When debt becomes overwhelming, it’s natural to fear the worst, especially the thought of losing your retirement savings. If you’ve spent years building a nest egg through a 401(k), IRA, or pension, the idea of watching it disappear can be deeply unsettling.
The good news is that filing for bankruptcy in New Jersey does not mean giving up your retirement future. Federal and state laws provide strong protections for most types of retirement accounts. These protections were designed to ensure that bankruptcy gives you a fresh financial start without sacrificing your long-term security.
However, these laws can be complicated. Understanding which accounts are protected and how to properly structure your bankruptcy case requires careful legal guidance.
If you’re considering bankruptcy and want to make sure your retirement savings stay intact, call Straffi & Straffi Attorneys at Law at (732) 341-3800 to speak with a New Jersey bankruptcy attorney who can help you protect what matters most.
The Federal Shield: Your First Line of Defense
If you’re thinking about bankruptcy, you may be worried about what will happen to your retirement savings. That concern is valid. But here is some reassuring news. Federal laws exist to help protect the money you have worked hard to save. These laws are strong and are designed to give you peace of mind.
ERISA: Protection for Employer Plans
One of the strongest protections comes from the Employee Retirement Income Security Act, known as ERISA. If you have a retirement plan through your job, such as a 401(k), 403(b), or a pension, this law likely covers it.
ERISA requires that money in these plans be kept in a special trust. This trust is separate from both your own personal funds and your employer’s business accounts. The law also demands that every ERISA plan include a rule preventing that money from being handed over to someone else, including creditors.
Because of these rules, funds in ERISA-protected accounts are not counted as part of your property when you file for bankruptcy. The bankruptcy court cannot take them. They are legally protected and stay with you.
BAPCPA: Help for IRAs
If your savings are in an IRA rather than a work-based plan, another law applies. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, or BAPCPA, provides protection for traditional and Roth IRAs.
Before this law, protection for IRAs depended on where you lived. Some states offered strong safeguards. Others did not. BAPCPA fixed this through a clear, nationwide rule.
As of April 1, 2025, you can protect up to $1,711,975 in combined IRA savings. This limit includes both traditional and Roth IRAs. It is also adjusted every three years to reflect the cost of living. That means the amount you are allowed to keep increases over time.
It is important to understand the difference between how these two laws work. ERISA-protected funds are excluded from your bankruptcy case entirely. IRA funds are included in the case, but the law allows you to keep them up to the limit. This may seem like a small legal point, but it can affect your options, especially if you are filing in New Jersey.
New Jersey Bankruptcy Lawyers
Daniel Straffi, Jr., Esq.
Daniel Straffi, Jr. focuses his legal practice on representing individuals and businesses in bankruptcy proceedings, as well as divorce and criminal defense matters. Admitted to practice in New Jersey and Pennsylvania, he began his legal career in 2001 as a judicial law clerk for the Hon. Lee Forrester, P.J.F.P., in Mercer County.
He later worked at Cooper Levenson, handling negligence defense before joining his family’s law firm in 2004. Mr. Straffi is actively involved in the legal community as Co-Chair of the Bankruptcy Panel for the Ocean County Bar Association and serves as a certified mediator and early settlement panelist.
- Graduate of Boston College (B.A., 1998) and Rutgers-Camden School of Law (J.D., 2001)
- Admitted in NJ, PA, and District Court of New Jersey
- Member of the New Jersey and Ocean County Bar Associations
- Concentrates on personal and business bankruptcy matters
Daniel Straffi, Sr., Esq.
Daniel Straffi, Sr. has practiced bankruptcy law in New Jersey since 1976, with a primary focus on Chapter 7 and Chapter 11 cases. He serves as a Trustee in bankruptcy for the District of New Jersey and has been appointed as a Chapter 11 Bankruptcy Trustee.
A member of the National Association of Bankruptcy Trustees, Mr. Straffi brings decades of experience representing clients in complex bankruptcy matters. He has also contributed to continuing legal education programs and remains active in both federal and state bar associations.
- Graduate of Rutgers College (B.A., 1973) and Seton Hall Law School, cum laude (J.D., 1976)
- Admitted in NJ, District Court of New Jersey, and U.S. Court of Appeals for the Third Circuit
- Trustee in bankruptcy since 1991
- Focuses on trustee and attorney roles in Chapter 7 and Chapter 11 bankruptcy cases in the Trenton vicinage
Not All Retirement Accounts Are Created Equal: A Breakdown of Protections
Not every retirement account is protected in the same way. The type of account you have plays a big role in how much of it can be shielded during bankruptcy. Knowing these differences is important if you want to be sure your savings are safe.
- 401(k)s, 403(b)s, and Pensions: ERISA usually covered these accounts, which gives them the strongest protection under federal law. They are fully protected in bankruptcy, with no limit on how much you can keep.
- Traditional and Roth IRAs: These accounts fall under the rules of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). As of April 1, 2025, they are protected up to a combined total of $1,711,975 per person. That includes both traditional and Roth IRAs together.
- SEP and SIMPLE IRAs: There is an important difference here. SEP IRAs (Simplified Employee Pension) and SIMPLE IRAs (Savings Incentive Match Plan for Employees) are treated like ERISA plans under federal bankruptcy rules. That means they are fully protected, just like a 401(k), with no dollar limit. This sets them apart from regular contributory IRAs, which do have a cap.
- Rollover IRAs: This is one of the most misunderstood areas of retirement protection. If you moved money from a protected ERISA plan, such as a 401(k), into a Rollover IRA, those funds keep their full protection. They are not limited by the $1.7 million cap. Even more, they do not count against the limit set for your contributory traditional or Roth IRAs. For example, you could have a Rollover IRA worth several million dollars and a separate contributory IRA with up to $1.7 million, and both would be fully protected.
Understanding how these rules work can make a major difference in what you are able to keep. If you are unsure how your accounts are categorized, speaking with a qualified bankruptcy attorney can help you make the right decisions to protect your future.
The New Jersey Advantage: State Laws and Strategic Choices
Federal law provides a strong foundation for protecting your retirement savings in bankruptcy. But if you live in New Jersey, state laws can offer added protections that may work even more in your favor. This is one reason why local legal guidance is so important. Knowing how to apply both federal and state laws can make a big difference in what you are able to keep.
Choosing Between Federal and New Jersey Exemptions
New Jersey is known as an opt-out state. This means you must choose between using the federal list of bankruptcy exemptions or the New Jersey state list. You cannot combine parts from both. Once you pick a list, that is the one you must use throughout your case.
This choice can have serious consequences. Many people prefer the federal list because it includes a generous homestead exemption that helps protect the value of your home. The New Jersey exemption list, in comparison, does not offer strong protection for home equity. However, it does provide powerful protection for other assets, such as some types of retirement accounts.
The better choice depends on your personal situation. Your income, your debts, the type of property you own, and your long-term goals all come into play. A lawyer who understands both options can help you make a smart decision.
Extra Protection for New Jersey Public Employees
If you work for the government in New Jersey, state law may fully protect your pension. This includes people who are part of these retirement systems:
- Teachers and school employees
- Police, firefighters, and emergency personnel
- State, county, and municipal workers
- Judges and other public officials
If you are in one of these groups, your pension is usually off-limits to creditors during bankruptcy.
Inherited IRAs and the Andolino Decision
One of the most unique features of New Jersey law is how it treats inherited IRAs. Under federal law, if you inherit an IRA from someone other than your spouse, it is not protected in bankruptcy. The United States Supreme Court decided in 2014 that these accounts do not count as retirement savings because you did not save the money yourself and can withdraw it at any time. That means creditors can take it.
However, New Jersey law offers a different outcome. In 2015, the Bankruptcy Court in New Jersey ruled in a case called In re Andolino that an inherited IRA can be protected under state law. The court pointed to a New Jersey statute that shields property held in a qualifying trust. The judge found that inherited IRAs meet that definition, and so they are not part of the bankruptcy estate.
This matters because under federal law, you would need to claim the IRA as exempt property, and the court could deny that request. But in New Jersey, the account is not considered part of the estate to begin with. That extra layer of protection could allow you to keep an inheritance that would be lost elsewhere.
If you inherit an IRA from your spouse, the rules are simpler. You can roll the money into your own IRA, and once that happens, it is treated just like your own retirement savings and fully protected.
Chapter 7 vs. Chapter 13: How Your Filing Choice Affects Your Plan
No matter which type of bankruptcy you file, the money already in your retirement account is protected. That includes 401(k)s, IRAs, and similar plans. But the chapter you choose can still affect how your future retirement contributions and loan payments are handled during the case.
Filing Under Chapter 7
Chapter 7 bankruptcy is meant to give you a fresh start in a short period of time. It is sometimes called a liquidation, but the good news is that your retirement account balance is safe and cannot be taken through the action of the bankruptcy trustee.
If you are not withdrawing from your retirement accounts yet, there is no impact on your case. But if you are already receiving money from a pension or taking required minimum distributions (RMDs) from an IRA, that money is counted as income. It must be included in what is called the means test, which helps decide if you qualify to file for Chapter 7.
Filing Under Chapter 13
Chapter 13 bankruptcy works differently. It is a repayment plan that lasts three to five years. Your retirement savings remain protected, just like in Chapter 7, but the court takes a closer look at your budget.
In Chapter 13, the trustee reviews your disposable income to figure out how much you should pay your creditors each month. If you are making voluntary contributions to a 401(k) during your case, the trustee may argue that this money should go to your creditors instead. As a result, you might have to pause those contributions while you are in the repayment plan.
Also, if you are paying back a 401(k) loan, the court usually does not treat that payment as a necessary expense. That means the amount you are putting toward the loan cannot be deducted when the court calculates your plan payment. You could end up needing to pay more to your other unsecured creditors as a result.
The Cardinal Rule: Critical Mistakes to Avoid with Your Retirement Funds
Retirement accounts are well protected in bankruptcy, but that protection is not automatic. A few common mistakes can put your savings at risk. These errors often come from people trying to do the right thing, yet the consequences can be serious and permanent.
Withdrawing Funds Before Filing
This is the most damaging mistake you can make. Many people, hoping to avoid bankruptcy, take money out of their 401(k) or IRA to pay off credit cards or catch up on bills. It may seem like the responsible choice, but it can backfire quickly.
As soon as you withdraw money from your retirement account, those funds lose their protected status. They become regular cash in your bank account, which is no longer shielded under bankruptcy law. If you end up filing for bankruptcy anyway, the trustee may be able to take that money to repay your creditors. In too many cases, people lose both their savings and their financial stability.
Making Large Contributions or Loan Payments Before Filing
It might seem like a good idea to boost your retirement savings or pay off a 401(k) loan right before filing. But the court may see this as an attempt to hide money. If you move a large amount of unprotected cash into a protected retirement account, or rush to pay down a loan, the trustee could claim that you were trying to keep money away from your creditors.
The court may reverse these transactions through what is known as a clawback. This means the trustee can take back the funds and use them to pay your debts. What started as a well-meaning move could end up causing more harm than good.
Overlooking Special Exceptions
Although retirement funds are strongly protected, there are a few specific situations where creditors can still reach them. These include debts related to a Qualified Domestic Relations Order (QDRO) from a divorce, certain tax levies from the IRS, and federal criminal fines. While these situations are rare, it is important to know they exist.
Protect Your Retirement with Trusted Legal Guidance
Filing for bankruptcy is a major decision, but it should not mean giving up the future you have worked hard to build. Both federal and New Jersey laws are in place to protect your retirement accounts, including 401(k)s, IRAs, and pensions. These protections allow you to move forward with a clean slate while keeping your long-term financial security intact.
However, the process can be complicated. From choosing between state and federal exemptions to understanding New Jersey’s unique rules, like the Andolino decision on inherited IRAs, each step requires careful attention. A simple mistake, such as withdrawing retirement funds before filing, can turn a protected asset into one that is fully exposed.
That is why it is so important to speak with a qualified attorney before making any financial moves. Even decisions made with the best intentions can result in lasting financial loss if they are not timed or handled properly.
At Straffi & Straffi Attorneys at Law, we are committed to helping you protect what matters most. With decades of experience guiding New Jersey residents through the bankruptcy process, we offer trusted advice, personal attention, and a clear plan to help you move forward with confidence.
Call Straffi & Straffi today at (732) 341-3800 to schedule your confidential consultation. Let us help you secure your future and take the next step toward lasting financial peace.
from Straffi & Straffi Attorneys at Law https://www.straffilaw.com/can-i-keep-my-401k-in-bankruptcy-in-nj/
