Chapter 13 Bankruptcy & Your 401k

Filing for bankruptcy was never part of your plans for the future. You’ve always taken pride in providing for your family, taking yearly summer vacations, saving for your children’s college fund, and planning ahead for your retirement by investing in your 401k. With the turn of the economy, many life-long hard-working families have found themselves in a position they never dreamed of. Loss of a previously stable career followed by extended periods of unemployment meant that savings accounts alone were not enough to stop families from watching their financial health deteriorate.

As you begin to research filing for bankruptcy as a means of ensuring better financial health for the future, there are many factors you must consider. One of the most pressing questions families have is, “What happens to my 401k if we file for bankruptcy?”

The State of Florida has done an excellent job of protecting the retirement investments of those residents that file for bankruptcy. That being said, here are a few things you need to keep in mind regarding your upcoming bankruptcy and 401ks:

Protection for 401k and Retirement Plans During Bankruptcy

401k and other retirement accounts that qualify under the Employee Retirement Income Security Act (ERISA) are generally not considered part of your bankruptcy estate. There are federal laws that protect different types of retirement accounts exempt from taxation under certain sections of the IRS code. For example, non-ERISA accounts, like IRAs, are also protected in Florida.

Do Not Withdraw a Large Amount of Money Before Filing Bankruptcy

As tempting as it might be to borrow against your 401k as a way to make ends meet until you’re able to get back on your feet, resist it! Depending on when you borrow the money, the courts very well may consider it as income. This is not beneficial to you, especially since during your proceedings the courts will approve a budget based on your current income and expenses. Any inflation to your budget based on a large non-reoccurring contribution, such as a loan, will skew your budget and may leave you with a budget that is not realistic.

You Will Be Able to Repay Your 401k Loan

If you have previously borrowed against your 401k before considering bankruptcy, you will be allowed to continue to make the payments back.

Remember that while it’s never been in your plans for the future if the time has come that bankruptcy is the best option to secure your financial future, there are ways to protect the assets that you’ve spent years creating. Consulting with an attorney who specializes in filing for personal bankruptcy is the first step you should take as you prepare to begin this process. They will be able to guide you through the proceedings and will ensure that you’re rights and assets are protected.