Does Filing for Bankruptcy Affect My 401k?

401k and bankruptcy401k and Bankruptcy

A 401k retirement savings plan is one of the primary ways people save for the later years in their life when they won’t be working. It allows you to automatically put money into savings gradually. The deposits are tax-deferred and in most cases, a portion is matched by your employer. It’s easy to understand why this savings plan appeals to so many people.

But what happens if you file for bankruptcy? Do you need to worry about losing the money you’ve accumulated in your 401k?

Knowing what to expect when it comes to your retirement savings makes your decision whether or not to file for bankruptcy much easier.

Here’s what you need to know:

401k Savings is Handled Differently in Chapter 13 and Chapter 7

What happens to your 401k is different based on whether you file for Chapter 7 or Chapter 13 bankruptcy.

In Chapter 7 bankruptcy cases, the trustee liquidates your assets. The trustee then uses the proceeds from liquidation to pay a portion of your debt.

However, the assets liquidated don’t include your 401k. The Employee Retirement Income Security Act excludes your 401k and other retirement savings. It’s always smart to double-check that you’re entitled to the protection before you file, but for most people, 401k savings is off-limits in Chapter 7 bankruptcy.

If you’d like to know more about the Employment Retirement Income Security Act, check out this information from the US Department of Labor.

There is no liquidation in Chapter 13 bankruptcy. The good news is you still don’t need to worry too much about your 401k when you file for Chapter 13.

In this type of bankruptcy, your debt is paid from your disposable income. You create a three- to a five-year payment plan and make payments each month based on your income. Your 401k savings has nothing to do with your payments. Chapter 13 doesn’t involve property liquidation, so your assets aren’t a factor.

The bottom line is regardless of whether you file for Chapter 7 or Chapter 13, your 401k savings is protected.

Does Bankruptcy Pose Any Risk to Your 401k Savings?

In most bankruptcy cases, your 401k retirement savings plan is protected.

However, there are a few risks you should know about.

Bankruptcy protections no longer apply if you transfer money from your 401k to a non-exempt account. The moment the money leaves your 401k account any protections provided by bankruptcy laws are gone.

You should also avoid dumping a chunk of money into your 401k or any retirement savings account right before filing for bankruptcy. Larger than usual deposits tend to raise red flags, which might lead to accusations of fraudulent transfer. You don’t want to put your entire case at risk.

An Attorney Helps You File for Bankruptcy without Putting Your Savings at Risk

The idea of filing for bankruptcy when you’ve accumulated savings in a 401k plan is frightening.
Working with an experienced bankruptcy attorney reduces any risk to your 401k savings. You get your questions answers and you’ll know if anything you do will put your savings at risk.

To schedule a consultation to discuss your concerns or learn more about how bankruptcy can help you, contact R. Flay Cabiness, II, P.C. at (912) 554-3774 (Brunswick, GA); (912) 375-5620 (Hazlehurst, GA) or; (912) 554-3756 (Jesup, GA) to schedule a consultation.

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Hazlehurst, GA 31539
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Jesup, GA 31545
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