Can I Keep My Retirement Savings If I File for Bankruptcy in California?

Bankruptcy is a process for resolving and discharging debt, but there are many misconceptions about the process that could affect your decision to file. Many debtors continue to believe the myth that they will lose everything by filing Chapter 7 or Chapter 13, leading to specific concerns about retirement. You have worked hard to ensure you have solid financial footing when you leave the workforce. Before moving forward, it is important to know whether you can keep your retirement savings if you file for bankruptcy in California.

Fortunately, rendering debtors destitute is not the goal of bankruptcy laws. Instead, the process aims to ensure you can get a fresh start. Taking away your retirement would not serve this objective, so most plans are protected. This rule is generally the case for both Chapter 7 and Chapter 13 bankruptcy, but there are exceptions. 

Because there are many details regarding retirement savings in bankruptcy, it is important to discuss your circumstances with a California bankruptcy lawyer. Plus, there are numerous other issues that you need to know about Chapter 7 and Chapter 13. Some basic information about the laws is useful, since they do work in your favor for most retirement plans. 

Overview of the Bankruptcy Process

There are two types of bankruptcy available to individual debtors and married couples, and Chapter 7 is a popular option for bankruptcy discharge. You can eliminate all qualifying debt if you qualify, which requires a careful assessment of your income. Eligibility depends upon how your earnings compare to the state median income level, or if you meet the Means Test. Keep in mind that Chapter 7 may include liquidation as a way to satisfy your debt to creditors. This means the bankruptcy trustee can sell nonexempt assets, raising questions about your retirement savings.

With Chapter 13 bankruptcy, you will also discharge qualifying debt through the process. However, instead of liquidation, you pay creditors via a debt repayment plan. The only eligibility rule is that you must be employed, since your job is the source of income to pay under the plan. There is no liquidation with Chapter 13, so you might opt for this type of bankruptcy if you are concerned about losing assets.

Bankruptcy Laws on Retirement Savings

The liquidation aspect of Chapter 7 cases is what puts debtors in fear that they will lose retirement savings. However, the key is that the bankruptcy trustee can only sell nonexempt assets. Those that are exempt are yours to keep. There are many rules about exemptions to protect your real estate and personal property, but the most important with respect to your retirement is found in the Employee Retirement Income Security Act (ERISA). The funds in any plan that is covered by the statute cannot be touched by the bankruptcy trustee, as long as they remain in the plan.

Some examples of employer-sponsored plans that are protected by ERISA are:

• Individual Retirement Accounts (IRAs) and Roth IRAs, subject to a statutory cap;
• Simplified Employee Pension Individual Retirement Account (SEP-IRAs);
• Plans created under 401(k) or 403(b) of the Internal Revenue Code;
• Profit-sharing plans;
• Many other retirement, pension, and employee savings plans.

If your plan is not covered by ERISA, it could be subject to liquidation by the bankruptcy trustee.

Other Bankruptcy Exemptions in California

In addition to protecting your retirement savings, bankruptcy laws also allow you to apply exemptions to other assets. There are exemptions under both federal and US state laws, but there are rules regarding which you can use. In California, you must use state exemptions to protect property. Aside from your retirement, your home may be the most valuable item you own. There are two different approaches for the homestead exemption in California:

1. Section 704, also known as System 1, allows you to protect up to $600,000 in your home. The exemption only applies to equity, but it can cover a condo, apartment, boat, mobile home, or other type of residence.
2. If you choose System 2 or Section 703 exemptions, you can protect up to $31,950 of the equity in your primary residence. The lower amount for the homestead exemption may be suitable for renters or those without significant home equity to protect.

In addition to your home, you can also apply exemptions to vehicles, personal belongings, jewelry, and many other items.

Do’s and Don’ts with Bankruptcy Cases

In the context of protecting your retirement savings, there are some important points to realize as you lead up to filing for bankruptcy. Keep in mind that your retirement is protected while it remains part of the plan. Once you take distributions or withdrawals, those funds become your own. They will be subject to the bankruptcy process, so you could lose your retirement savings once you gain access to the money. 

For this reason, it is almost never a good idea to take from your retirement to pay debt. These amounts would be protected in bankruptcy, giving you a financial foundation when you leave the workforce. Plus, you should note that funds from retirement will be included when assessing income levels for Chapter 7. If your income is too high to qualify, the other option is Chapter 13 bankruptcy.

Some additional tips for bankruptcy include:

• Do take a careful look at your monthly budget. You need to know the big picture about your expenses and income before filing.
• Don’t make any luxury purchases or buy big ticket items as you prepare to file your bankruptcy petition.
• Do continue to pay your mortgage. Even though there is an automatic stay that stops a lender from foreclosing, this may be only temporary. Lenders can ask the court to lift the stay, enabling them to proceed with a foreclosure action.
• Don’t attempt to sell or transfer assets for less than fair market value. The bankruptcy trustee can reverse any transactions deemed to be fraudulent.
• Do take advantage of ways to rebuild credit after bankruptcy. Paying your mortgage and staying current on monthly bills will create a positive track record. You may also consider a secured credit card in which you deposit funds as collateral.
• Don’t make the mistake of going it alone with bankruptcy. Getting help from a lawyer is key to protecting assets, including retirement. 

Consult with a California Bankruptcy Attorney Right Away

This summary provides background on whether you can keep retirement savings if you file for bankruptcy in California, but there are many additional details that will affect your case. For additional information on ERISA and other types of retirement plans in bankruptcy, please contact Kostopoulos Bankruptcy Law. We can set up a consultation with a California bankruptcy lawyer who will advise you on your options.