Keep my 401(k) in bankruptcy

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Can Bankruptcy Affect 401(K) and Retirement Accounts?

Bankruptcy has been designed in a way to help people recover from bad financial conditions. Consumers can file for bankruptcy under chapter 7 or chapter 13. In either case, they get to keep their retirement funds. The state, as well as the federal government, has exemption laws that prevent an individua’s property against creditors and bankruptcy trustee. The retirement accounts are part of the exemptions provided by the government. These include:

  • 401(k)s
  • 403(b)s
  • Profit Sharing Plans
  • Defined-Benefit Plans
  • Money Purchase Plans
  • Traditional IRAs, Roth IRAs, SEP IRAs, SIMPLE IRAs
  • Keoghs

In short, all funds in retirement accounts are protected with a few exceptions, like, an IRA account is exempted up to $1,245,475 per person. Bankruptcy lawyers of Dallas based firm ( inform that during your bankruptcy you should not make these mistakes –

  1. Don’t take money out of your retirement account. Taking money out of your retirement account essentially converts it from an exempt property into a non-exempt property. The money is no longer protected and is treated like regular cash, which can be collected by creditors.
  2. Don’t use money from your retirement account to pay debts. Many people think that using a 401(k) to pay their debts can help avoid bankruptcy. However, after filing for bankruptcy, take get to know that they could have saved their retirement fund and emerged from bankruptcy intact.
  3. Don’t deposit money from other accounts into your retirement account. Trying to convert your non-exempt assets into exempt assets is not look kindly during bankruptcy. Moving of funds from other accounts into your retirement account can be conceived as a fraud. In case this happens, your retirement account could lose the exempted status. you might even end up losing your 401(k) during bankruptcy.

Excluded Retirement Plans

Apart from the exempted retirement plans, there are some which are “excluded” in bankruptcy, i.e. they do not form a part of the bankruptcy estate. Almost all pension and 401K savings plans, which are qualified under ERISA, the federal savings act, are excluded from the bankruptcy estate. However, as always, there are exceptions to the rule. Retirement plans with the only single participant (single employee corporate plans) and plans originating in self-employment may become part of the bankruptcy estate unless subjected to an exemption. Creditors can stake claim to those funds unless efforts are made to protect them. The list of excluded retirement accounts includes:

  • Educational Individual Retirement Accounts (IRA) under IRC 530(1)(b)
  • Pension and Retirement Plans that are qualified under the Employee Retirement Income Security Act (ERISA)
  • IRC 414(d) Government Retirement Plans
  • IRC 567 Deferred Compensation Plans
  • IRC 403(b) Tax Deferred Annuity Plans

However, their excluded status might have some limitations. Consulting with a bankruptcy attorney is recommended for a clearer picture.

You must list your retirement accounts on the bankruptcy schedule (though you can keep the money in those accounts). Bankruptcy schedules provide your financial information to the court. In case you are having trouble with your finances and are thinking of filing for bankruptcy, call 888-297-6023 to discuss your case with bankruptcy lawyers. They can guide you on how to protect your retirement accounts in case of bankruptcy.