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, you can protect retirement accounts, including a 401k, 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 Bankruptcy Exemptions.

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.

If an asset is property of the estate, you must be able to protect it with a bankruptcy exemption if you want to keep it. In Chapter 7 bankruptcy, the bankruptcy trustee can take or sell your nonexempt asset—the property that isn’t protected by an exemption—and distribute the proceeds to your creditors.

Assets that aren’t property of the estate are safe in bankruptcy and can’t 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 Aren’t Part of the Bankruptcy 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 accounts. If you are considering filing for bankruptcy, it’s a good idea to 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. As a result, an ERISA qualified 401k account can’t be used to pay your creditors.

Additional Retirement Account Protections

If your retirement plan is included in 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. Funds in non-ERISA plans like IRAs are protected up to $1,362,800 per person total under federal law. (11 U.S.C. § 522(n).) This figure is current as of April 1, 2019, and will change again on April 1, 2022.

Learn more about federal bankruptcy exemptions. Most states have their own exemptions that cover retirement accounts in bankruptcy, as well.

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 before filing your case, it won’t receive the special protections afforded to retirement funds. In addition, if your retirement plan is fraudulent or otherwise not a legitimate retirement account, it won’t be protected in bankruptcy.

Find out about protecting bank accounts in bankruptcy.

Updated: April 2, 2019

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