Retirement Realities
Retired couple on beach
Does bankruptcy in retirement make sense?

Are retirement funds protected?
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Are retirement funds protected?

Like Social Security, most retirement vehicles such as 401(k)s and pensions are exempted under federal bankruptcy law. That means creditors can't touch those assets in a bankruptcy, says attorney Melissa Herman in Woodstock, Ga.

Seniors with particularly hefty pensions, however, may not be eligible for Chapter 7 liquidation, and instead may be forced to file a Chapter 13 repayment plan, which can be tricky because seniors often lack the disposable income needed to make repayment work. Put another way, some seniors may have too much income to qualify for Chapter 7, but not enough cash flow to pay off their debt and take care of living expenses.

Seniors who have IRAs are treated a little differently in bankruptcy. Federal law exempts IRAs up to $1,095,000. But seniors filing in states with a higher exemption can use their state's statute to increase their exemption. Thankfully, most state exemptions are "large enough to cover most, if not all of a person's specific retirement accounts," says Herman. However, each state varies, so it's best to check with a local bankruptcy attorney.




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