Can You Lose Your 401k by Filing Bankruptcy?

If filing bankruptcy is beginning to look like it might be the only way out of your debt problems, you've probably started wondering what filing will do to retirement accounts, like your 401k.

Assets

Your house, savings account, and anything else you can sell is an asset in a bankruptcy case. However, depending on the state in which you file (and the amount of equity you have in an item and the chapter of bankruptcy you file under), an asset may be considered exempt from liquidation.

Bankruptcy and Your 401k

If your 401k qualifies under ERISA, it includes an anti-alienation clause. This clause makes creditors unable to go after your retirement savings to pay a debt.

Retirement Plans That Are Not Protected

If your retirement plan has only one participant, your 401k may not be protected, and your account could be liquidated.

Bankruptcy & 401k Contributions

In some cases, continued 401k contributions during a bankruptcy proceeding may be considered unnecessary by the trustee. Discuss your current contributions with your attorney.

Cashing Out Your 401k

If you cash out your 401k to avoid bankruptcy, you will no longer have retirement savings. You will have to pay taxes on the amount you receive from the account, and you may keep yourself from being able to file under Chapter 7.

References

• Bankruptcy Basics
• Retirement Savings in Bankruptcy
• Your 401(k) and Bankruptcy

Resources

• Entrepreneur: How the New Bankruptcy Law Affects Your IRA