Protecting Retirement Savings in Bankruptcy in Detroit

Reviewed by James Frego, bankruptcy attorney at Frego & Associates.

You spent decades building your retirement savings, and now the debt collectors are circling. For a lot of people over 60, the fear of losing that nest egg is the very reason they never file for bankruptcy at all. Here is what few of them realize: in most cases, the law lets you keep it.

Older Detroiters Are Filing for Bankruptcy in Record Numbers

More folks over the age of 65 are now going bankrupt. In fact, the rate at which this age group files has more than doubled since 1991. These days, they make up 12% of all those who file for bankruptcy, compared to just 2% roughly 30 years ago.^[1]

Dealing with possible financial problems in Michigan might make someone think about taking out money from their retirement savings, or maybe filing for bankruptcy. This is a valid fear. Still, the law provides certain cushions to help a senior person get through a bankruptcy situation.

What Are the Michigan Bankruptcy Exemption Timing Rules?

When a person thinks about filing for bankruptcy, they might want to move to a state where the rules are more in their favor. But the system does not allow this to be done easily.

To stop people from taking advantage of the rules, a person needs to have lived in the state for at least two years. If they haven’t, then the rules from the last state they lived in will still apply.

Here’s how this works. If someone has made their home in the current state for at least two years, they can follow that state’s rules. Some states might let them choose between the state’s rules and the federal ones, if allowed.

But if a person hasn’t been in the same place for the last two years, things get a bit tricky. The person will have to use the rules of the state where they spent the most time during the 180 days right before the two years leading up to filing.^[2]

Are Retirement Savings Safe During a Detroit Bankruptcy?

When people think about going bankrupt, they often worry about their hard-earned retirement money. A Detroit bankruptcy does not automatically take away retirement savings, whether it is Chapter 7 or Chapter 13 bankruptcy.

In most cases, retirement money is kept safe to make sure people have something to rely on when they are older.

If a person is drowning in medical bills or credit card debt, bankruptcy can offer some blessed relief. There are two options: Chapter 13 and Chapter 7. Both offer protection for retirement accounts, so a person can usually keep a good portion of their savings.

Chapter 7

In Chapter 7 bankruptcy, most of a person’s things are sold off to pay back what they owe, but some things, like retirement accounts, are protected from this. Federal bankruptcy laws help protect a certain amount of money in these accounts so they do not get used to pay off debts.

Federally, according to 11 U.S.C. §§ 522(b)(3)(C), 522(n), Traditional and Roth IRAs are protected up to a combined $1,711,975 per person for cases filed between April 1, 2025 and March 31, 2028.^[3]

Employer-sponsored plans like 401(k)s and 403(b)s are ERISA-qualified and protected with no dollar limit, no matter how large the balance. These accounts stay exempt under the federal rules even if the filer uses state exemptions. Only IRA savings above the cap could potentially go to creditors.

Chapter 13

Chapter 13 bankruptcy is different because it is about making a plan to pay back what a person owes over time, usually over three to five years, without selling their stuff.^[4] This means that, like in Chapter 7, a person’s retirement accounts are protected, letting them keep their retirement savings while they work on paying back their debts.

How 401(k) Accounts Are Treated in Bankruptcy

A 401(k) is a retirement savings account that many people get through their job, where they can save part of their pay before taxes. In bankruptcy, both Chapter 7 and Chapter 13, the rules around 401(k)s are generally good for the person who owns the account. Here is how it works.

Chapter 7

Federal laws offer strong protection for some types of property, like 401(k) accounts. These accounts are usually safe from being taken to pay off debts. The Employee Retirement Income Security Act (ERISA) helps protect these accounts in bankruptcy, so people can often keep their retirement savings even if they are facing money problems.^[5]

Chapter 13

Just like in Chapter 7 bankruptcy, 401(k) accounts are protected in Chapter 13. People can usually keep their 401(k) savings safe while they follow a plan to pay back what they owe, which helps keep their future financial situation stable.^[5]

Are There Other Retirement Plans That Are Safe from Bankruptcy?

In bankruptcy, there are other retirement plans that are also protected, helping people keep their savings. Besides 401(k) accounts and IRAs, other retirement accounts are often protected. Here are some examples:

• 403(b) Plans: These are similar to 401(k) plans and are also protected in bankruptcy. They are usually for people working in schools or nonprofit places.
• Defined Benefit Plans: These are pension plans that promise a certain amount of money when the person retires. They are also usually protected in bankruptcy.
• Profit-Sharing Plans: These plans let employers share some of their profits with their employees by putting money into retirement accounts. These plans are usually safe from bankruptcy.

Should You Take Out Retirement Savings or Keep Them During Bankruptcy?

Taking money out of retirement savings instead of filing for bankruptcy is a choice that needs careful thinking. While it might give you money right away to deal with financial problems, it can have serious downsides and might hurt you in the long run. Here are some things to think about:

• Tax Issues: If you take money out of a retirement account early, especially before age 59½, you might have to pay income taxes and a 10% penalty, which can really cut into the money you get.^[6]
• Hurting Future Finances: Retirement savings are meant to help people when they are older. Taking this money out too early could make your future financial situation tough, leaving you with not enough money to live on during retirement.
• Bankruptcy Protection: Retirement accounts are usually protected in bankruptcy, so people can keep their savings while they work through their financial problems. Bankruptcy gives you a legal way to deal with debts while keeping important things like your savings.
• Impact on Credit Score: Bankruptcy can hurt your credit score, though the accounts you were tempted to drain would have stayed protected either way.

Tips for Not Losing Money When Filing for Bankruptcy

Here are some tips to help make sure you do not lose money from your checking or savings accounts when filing for bankruptcy.

• Have a bank account that is in good shape before starting the bankruptcy process.
• If you owe money to your current bank, you might want to open a new account at a different bank.
• Keep any protected money in a separate account.
• Nonprotected funds can be used for bills, car repairs, or clothing. Keep records, and do not pay for things too far in advance.
• Before filing, make sure all charges have cleared from the account and the balance is low, at least a day ahead.

Frequently Asked Questions

Sources

1. Copeland, L. (Aug. 9, 2018). As Health and Financial Challenges Grow, More Older Adults File for Bankruptcy. Medicare Rights Center. medicarerights.org
2. Legal Information Institute, Cornell Law School. 11 U.S.C. § 522, Exemptions. law.cornell.edu/uscode/text/11/522
3. National Consumer Law Center (Apr. 1, 2025). April 1 Increase of Federal Bankruptcy Exemptions, Other Dollar Amounts. NCLC Digital Library. library.nclc.org
4. United States Courts. Chapter 13, Bankruptcy Basics. uscourts.gov
5. FindLaw. Is Your 401(k) or IRA Protected in Bankruptcy? findlaw.com
6. Internal Revenue Service. Topic No. 558, Additional Tax on Early Distributions. irs.gov/taxtopics/tc558