Your 401k and Bankruptcy: Is It Protected?

Understanding your 401k and bankruptcy law is critical before you file. Bankruptcy laws do protect employer sponsored retirement accounts, including the 401k. This means that creditors are unable to come after these retirement funds. It also means that your retirement account is protected from seizure by the bankruptcy attorney to repay creditors. Still, there are several things you should realize.

401k and Bankruptcy

If you are filing bankruptcy, it is always a good idea to hire an attorney to help you through the process. One of the things that an attorney can do for you is to help you to protect your assets, including your retirement accounts. Consider the following requirements for filing bankruptcy.

  • A Supreme Court ruling found that retirement accounts cannot be taken by creditors under the anti-alienation clause.
  • These funds are not part of your bankruptcy estate, which includes all of the property that you own otherwise. The bankruptcy estate is held by the trustee until a determination is made about whether the property is protected through exemptions or not.
  • In order for any type of retirement plan to qualify, it must be a qualified plan under the ERISA. This is the federal pension savings act in place.
  • However, IRA's and other single ownership types of retirement plans are not protected. If you own an IRA, for example, your retirement plan may or may not be protected, depending on its size and other limitations.

If you do own an IRA, your contributions are protected up to $1 million currently, though this amount may change every three years. If you have a 401k account, in general, those funds are fully protected. Other types of savings accounts, such as savings accounts, checking accounts and similar types have no protection even if you label them as for retirement. In these situations, the bankruptcy trustee can confiscate those funds unless they are protected by your exemptions.

It is important that you do not try to place excessive funds into this account for the purpose of hiding or protecting the funds from your creditors or the bankruptcy court. You also are unable to have any type of 401k loan discharged during bankruptcy.

Hiring an Attorney

If you are planning on filing bankruptcy, hire an attorney to legally represent you in a court of law.  The attorney can help you to protect many of your assets, including your 401k and other retirement accounts.  

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