Are 401(k) savings safe in bankruptcy?
For many people who find themselves struggling with significant debt, filing for bankruptcy can provide an opportunity for a fresh financial start. Nevertheless, some people are hesitant to consider filing for bankruptcy out of concern about whether certain assets would be protected. Fortunately, bankruptcy law provides those filing for bankruptcy with protection to ensure that important assets – including some retirement savings – remain protected from creditors.
Most people in the U.S. set aside savings each month in a 401(k) retirement account. No matter whether someone decides to file for Chapter 7 or Chapter 13 bankruptcy, funds held in a 401(k) account are protected by both state and federal law. While creditors may be able to seize funds held in traditional checking, savings and brokerage accounts, they cannot take money from a 401(k) account.
Of course, there are some limitations on the protections afforded to these accounts. Perhaps the most important point is that funds held in a 401(k) account are only protected so long as they are held in a 401(k) account. If, for example, someone takes a loan from his 401(k) and transfers the money to his checking account, that money would no longer be protected from creditors and would be treated like any other asset. In the case of a Chapter 7 bankruptcy, these funds would be added to the filer’s pool of assets used to pay creditors. In a Chapter 13 bankruptcy, they would be used to determine the details of a filer’s debt repayment plan.
On the surface, it may seem to make sense for someone facing a significant amount of high interest debt or having difficulty paying daily expenses to transfer money out of their retirement savings to help make ends meet. This decision can, however, have serious consequences. Not only does it make it easier for creditors to collect money they would otherwise not be entitled to, but also may jeopardize a person’s long term financial health.
For those considering whether to file for bankruptcy, it is essential to consult with an experienced bankruptcy attorney before making any decisions regarding the use of funds held in a 401(k) or any other retirement account. A bankruptcy attorney can help potential bankruptcy filers understand their rights and how best to protect their hard earned assets. Contact an experienced bankruptcy attorney to learn more about whether filing for Chapter 7 or Chapter 13 bankruptcy is an option for you.