Is my 401k Account Exempt or at Risk in Bankruptcy?

In most cases, your 401k and other retirement accounts are protected in bankruptcy.

In most cases, your retirement accounts including a 401k are protected from your creditors in bankruptcy. Read on to learn more about whether your 401k account is exempt in bankruptcy.

For more information on how to protect your property in bankruptcy, see our Bankruptcy Exemptions topic area.

Difference Between Property Excluded from the Bankruptcy Estate and Exempt Property

When you file for bankruptcy relief, almost all property you own becomes property of the bankruptcy estate. When an asset is property of the estate, the bankruptcy court has the power to administer it in your case. In Chapter 7 bankruptcy, this means that the bankruptcy trustee can take or sell your nonexempt assets and distribute the proceeds to your creditors.

If an asset is property of the estate, you must exempt it if you want to keep it. Assets that are not considered property of the estate are safe in bankruptcy because they cannot be administered by the court. Most retirement accounts are protected in bankruptcy because they are either not property of the estate or they are exempt.

ERISA Qualified Retirement Accounts Are Excluded from Property of the Estate

401k and other retirement accounts that are qualified under the Employee Retirement Income Security Act (ERISA) are typically not part of your bankruptcy estate. Most employer-sponsored retirement plans are ERISA qualified. But if you are considering filing for bankruptcy, check with your employer to make sure your 401k is qualified.

ERISA qualified retirement plans have transfer restrictions that protect the funds in your account from creditors. The Supreme Court has ruled that this transfer restriction is enforceable in bankruptcy and excludes ERISA qualified plans from property of the bankruptcy estate. This means that an ERISA qualified 401k account is protected in bankruptcy and cannot be used to pay your creditors.

Additional Retirement Account Protections

If your retirement plan is considered property of the bankruptcy estate, federal and state laws provide exemptions to protect your account in bankruptcy. Regardless of which state you live in, federal law protects all retirement accounts that are exempt from taxation under certain sections of the Internal Revenue Code. Non-ERISA plans like IRAs are also protected up to $1,283,025 (in aggregate) under federal law. In addition, most states have their own exemptions that cover retirement accounts in bankruptcy.

When Is a Retirement Account Not Protected?

As discussed, your 401k and other retirement accounts are typically safe in bankruptcy. However, if you withdraw money from your retirement account and purchase other assets or place the money in a regular bank account prior to filing your case, it will not receive the special protections afforded to retirement funds. In addition, if your retirement plan is fraudulent or otherwise not a legitimate retirement account, then it will not be protected in bankruptcy.

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