In 2005, Congress enacted some reforms to the bankruptcy law that change the way retirement plans like 401(k) are treated in bankruptcy proceedings. It is important to know how your retirement plan is treated in Chapter 7 bankruptcy under the reformed bankruptcy laws.
401(k) Exempt
Under the new laws, retirement plans are almost universally exempt from bankruptcy proceedings, including Chapter 7 liquidation. This means that your 401(k), IRS, Roth IRA or other retirement account cannot be used as an asset to pay back your creditors, and you will emerge from Chapter 7 proceedings having kept all the money in your retirement account. There are some exceptions to this rule, but they are very specific and do not apply in most cases. This is good news for many holders of retirement plans who are facing huge debts and considering Chapter 7 liquidation; it ensures that their nest egg remains intact and that they come out of the proceedings with something to build for the future.
The exception to the rule has to do with IRAs and Roth IRAs in excess of a pre-defined limit, currently at about $1.25 million. Anything over this amount contained in an individual IRA or Roth IRA is not subject to the exemption and can be used by the trustee to pay back your debts under Chapter 7. This is pretty much the only exception to the rule, and as you can see it applies only in certain cases. If you are considering bankruptcy consult with a Clearwater bankruptcy attorney to learn more about what assets you will and will not be able to protect during the proceedings.