For many Michigan residents considering Chapter 7 bankruptcy, one of the first and most urgent questions is: “Will I lose my 401(k) or IRA?”
The good news — and it really is good news — is that in most cases, your retirement savings are fully protected. But the details matter, and understanding them before you file can make an enormous difference.
Filing for Chapter 7 bankruptcy can feel like standing on the edge of a cliff. You’ve spent years — maybe decades — contributing to your retirement accounts, and the thought of seeing that savings wiped out on top of everything else is genuinely terrifying. Fortunately, federal bankruptcy law and Michigan state law both recognize that retirement assets deserve special protection. Here’s what you need to know.
The Basics: What Chapter 7 Does to Your Assets
Chapter 7 bankruptcy is often called “liquidation bankruptcy.” When you file, a court-appointed trustee is assigned to your case. The trustee’s job is to identify any non-exempt assets you own, liquidate them, and use the proceeds to pay back your creditors as much as possible. Whatever qualifying debt remains after that process is discharged — meaning you are legally released from the obligation to pay it.
The critical word in that paragraph is non-exempt. Not all of your property is up for grabs. Both federal law and Michigan law carve out categories of assets that are protected from the bankruptcy process — things like a portion of your home’s equity, your car (up to a certain value), household goods, and crucially, most retirement accounts.
Federal Law: ERISA-Qualified Retirement Plans Are Broadly Protected
The strongest protection for retirement savings in bankruptcy comes from federal law. Under the Employee Retirement Income Security Act (ERISA) and the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), most employer-sponsored retirement plans are completely exempt from the bankruptcy estate. This means the trustee cannot touch them — period.
- What falls under this federal umbrella of protection?
401(k) plans - 403(b) plans (common for teachers and nonprofit employees)
- 457 plans (for state and local government employees)
- Pension plans and defined benefit plans
- Profit-sharing plans
- Keogh plans (for self-employed individuals)
- SEP-IRAs (Simplified Employee Pension plans)
- SIMPLE IRAs
If your retirement money is sitting in any of the accounts listed above, it is almost certainly completely protected in a Chapter 7 filing — with no dollar cap on the amount. Whether you have $20,000 or $2 million in your 401(k), that money is outside the reach of your bankruptcy trustee.
Key Point: ERISA-qualified plans, including 401(k)s and most employer-sponsored retirement accounts, are fully exempt from the bankruptcy estate under federal law. The trustee cannot liquidate them regardless of their value.
What About Traditional and Roth IRAs?
IRAs — both traditional and Roth — receive strong protection in bankruptcy, but the rules are slightly different. Rather than being completely excluded from the bankruptcy estate like ERISA-qualified plans, IRAs are protected through a federal exemption with a dollar cap that is adjusted periodically for inflation.
As of 2025, the combined exemption for traditional and Roth IRA accounts is $1,512,350 per individual. For the overwhelming majority of bankruptcy filers, this cap is more than sufficient — the average IRA balance is nowhere near that figure. If your total IRA balance falls below this threshold, your accounts are completely protected.
If you happen to have IRA balances above this limit, the excess is technically available to creditors through the bankruptcy process. This is an unusual situation, but it is something your attorney should know about and plan for before you file.
The Important Exception: Inherited IRAs
Here is where things get complicated, and it’s a nuance that trips up many filers. If you inherited an IRA from someone other than your spouse, that account is not protected in bankruptcy. The U.S. Supreme Court settled this question definitively in the 2014 case Clark v. Rameker, ruling that inherited IRAs do not qualify as “retirement funds” under the bankruptcy exemption because the inheritor cannot use them for their own retirement — they are subject to required minimum distributions regardless of the inheritor’s age.
There is a limited exception: if you inherited an IRA from your deceased spouse and rolled it into your own IRA, it may receive the same protection as your regular IRA. But if you inherited from a parent, sibling, or anyone other than a spouse, that account could be fair game for your bankruptcy trustee.
⚠ Important: Inherited IRAs (from non-spouses) are NOT protected in bankruptcy under federal law. If you have inherited IRA funds, make sure your bankruptcy attorney knows about them well before you file.
Watch Out for Rollover Funds
Another area that deserves careful attention is money that has recently been rolled over from a retirement account — for example, a 401(k) balance you rolled into a traditional IRA after leaving a job. In most cases, properly executed rollovers retain their protected status. However, if the rollover is very recent, or if there was anything irregular about how it was handled, a bankruptcy trustee may examine it more closely.
This is especially true if a trustee suspects that retirement accounts were used to shield money from creditors shortly before filing for bankruptcy. Courts look at the timing of large transfers into retirement accounts, and making unusually large contributions right before filing — particularly beyond your regular contribution pattern — can raise red flags.
Don’t Make This Mistake: Cashing Out Before You File
One of the most costly mistakes people make when they are drowning in debt and considering bankruptcy is cashing out their retirement accounts to try to pay off bills before filing. This approach is almost always counterproductive, and here is why:
Your retirement account would have been fully protected in bankruptcy — you didn’t need to touch it.
- Early withdrawals (before age 59½) trigger a 10% federal penalty plus ordinary income taxes, meaning you lose a significant chunk of the money immediately.
- Once the money leaves the retirement account, it is no longer protected. Cash sitting in a regular bank account is an asset the trustee can reach.
- Paying certain creditors with retirement funds before filing can also be considered a “preferential transfer,” which can create legal complications in your bankruptcy case.
If you are thinking about cashing out your retirement savings to manage debt, speak with a bankruptcy attorney before you do anything. In almost every case, filing for Chapter 7 and keeping your retirement account intact is the better financial outcome.
Can You Continue Contributing During Bankruptcy?
This is a question that comes up often, and the answer has some nuance. While your case is pending, you are generally permitted to continue making contributions to an employer-sponsored retirement plan through payroll deductions — particularly if those contributions are a standard condition of your employment or if your employer matches them. However, making large voluntary contributions designed to quickly move cash into a protected account after filing can attract scrutiny from the trustee.
As a practical matter, the Chapter 7 process is relatively brief — most cases are resolved within three to six months — so this is rarely a major issue. But it is something to discuss with your attorney when you review your overall financial picture before filing.
What Michigan Residents Should Know Specifically
Michigan allows bankruptcy filers to choose between the federal exemption system and Michigan’s state exemptions. For retirement accounts specifically, the federal exemptions are typically more favorable and more comprehensive, and most Michigan filers elect to use them. However, Michigan’s own state law also provides some pension protections — particularly for public employee pensions, which are protected by the Michigan Constitution.
If you are a Michigan state or local government employee, a public school teacher, a firefighter, or a police officer, your pension has constitutional protection in addition to whatever federal bankruptcy protections apply. You should discuss your specific situation with your bankruptcy attorney to understand exactly which exemptions will best protect your retirement assets.
Retirement Savings Are Rarely at Risk in Chapter 7
For the vast majority of Michigan residents filing Chapter 7 bankruptcy, retirement accounts survive the process completely intact. ERISA-qualified plans like 401(k)s are untouchable under federal law, and IRAs are protected up to a generous dollar cap that most filers will never approach. The key exceptions — inherited IRAs and accounts where large transfers may appear suspicious — are exactly the kinds of issues an experienced bankruptcy attorney will know to address before you file.
Filing for Chapter 7 does not mean starting over with nothing. For most people, it means discharging the debt that has been crushing them while keeping the assets that matter most — including the retirement savings they have spent their working years building. That is precisely what the law intends.
Ready to Protect What You’ve Worked For?
At The Mitten Law Firm, we help Michigan residents navigate Chapter 7 bankruptcy with clarity and confidence. We’ll review your specific retirement accounts, identify the right exemptions, and make sure nothing falls through the cracks before you file.