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Andy Masaki On 7th Jun,16
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filing-bankruptcy

The simple answer is NO! You have worked hard all your life to build a nest egg for your gray hair days. But now when you want to file bankruptcy, the thought of losing all your stockpile into the hands of cash-hungry creditors is horrifying.

Bankruptcy does have some adverse effects, but that doesn't mean you’ve to sacrifice everything. Well, for those who’re worried about losing their 401(k) savings in bankruptcy, let me tell you that your 401(k) account is safe in bankruptcy. Most of the employer-sponsored retirement plans get protection under the Employee Retirement Income Security Act (ERISA). So before you file bankruptcy, make sure your 401(k) account is ERISA qualified.

Impact of Chapter 7 and Chapter 13 bankruptcies on your 401(k) account

Chapter 7 and Chapter 13 are the two most common forms of personal bankruptcies. In a Chapter 7 bankruptcy, the ‘court-appointed trustee’ would liquidate all your (debtor's) non-exempt assets to the creditors according to the bankruptcy laws of your state. In the case of a Chapter 13 bankruptcy, you can reorganize your debts by working out a debt repayment plan with your creditors.

In the above two cases, your 401(k) account is protected under the state and federal laws. Filing bankruptcy won’t affect your 401(k) account. Funds and cash equivalents in your checking, savings, and traditional brokerage accounts aren’t safe in the hands of the creditors. Whereas, your 401(k) account remains unharmed in your hands. Since your 401(k) account remains untouched in bankruptcy, so you shouldn’t withdraw money from your 401(k) account to pay off other debts.

Bankruptcy and 401(k)

Are you thinking of filing bankruptcy? If so, then you should hire an attorney to guide you through the procedure. A bankruptcy attorney can safeguard your assets, which contains your retirement accounts also. Before you file bankruptcy, consider the following:

  • According to the Supreme Court, your retirement accounts remain untouched by creditors under the anti-alienation clause.
  • Your retirement plans are safe in bankruptcy only if it’s qualified under the ERISA.
  • Your retirement accounts are covered in bankruptcy because they are not ‘property of the estate’ or they’re exempt. Just as you file bankruptcy, almost each of your property turns into the ‘property of the estate’, which means that the bankruptcy court can include it in your case.
  • Single ownership retirement plans and IRA’s are certainly not protected. For instance, if you have an IRA, then your retirement plan may or may not be safeguarded, depending on its size and other limitations.

Presently, your IRA contributions are covered up to $1 million. This amount is subject to change every 3 years. However, funds in your 401(k) account are totally protected. Moreover, your saving and checking accounts and other similar types of accounts are not protected in bankruptcy. These accounts can get confiscated by the bankruptcy trustee if not guarded by your exemptions.

You shouldn’t keep extra funds into this account to hide or protect your assets from the eyes of your creditors or the bankruptcy court. Also, you won’t be able to discharge any type of 401(k) loan during bankruptcy. If you’re thinking of filing bankruptcy, then it’s a crappy idea to take out a loan from your 401(k) account or withdraw money from any of your retirement accounts. The bankruptcy court may consider your 401(k) account as non-exempt and may liquidate it to pay off your debts if you borrow money from it.

When is your retirement account unsafe in bankruptcy?

As stated earlier, your 401(k) and other retirement accounts are safe in bankruptcy. But, there is an exception. For instance, if you take out money from your retirement account and keep it in a normal bank account, or buy other assets with it before filing bankruptcy, then it’ll not get the special protections that are entitled to it. Also, a fraudulent retirement plan is not protected in bankruptcy. To receive the protection, it must be qualified under Employee Retirement Income Security Act (ERISA). So, make sure your retirement plan is ERISA qualified.

A final tip: Hire an attorney

Last but not the least, before filing bankruptcy you must hire a bankruptcy lawyer or attorney to guide you through the whole process. An attorney is well familiar with the nitty-gritty of the game. So, he or she will be able to save you in the bankruptcy court in the case of any discrepancy. Remember, when you are consider filing bankruptcy, an attorney is your friend, philosopher, and guide!

Don’t miss: 401k and IRA major amendments in 2016 - Rules for retirement accounts

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