Will money in my 401(K) be protected if I file bankruptcy?

Will money in my 401(K) be protected if I file bankruptcy?

Many people are afraid of filing bankruptcy because they have substantial money in their 401(K) that they do not want to be taken by the Trustee.  They should not be fearful because based on Federal law the entire amount in a person’s 401(K) is exempt from bankruptcy whether they file Chapter 7 or Chapter 13.  The purpose of the law is to make the money available to the person when he or she retires.  Hence, even if the amount of money in the 401(K) is $1,000,000.00 this money will not be taken away if a person files bankruptcy.

Question:  My lender is suggesting that I take out money from my 401(K) to pay my mortgage.  Is this a good idea?

Answer:     That is a big No – No.  Many people when they have no money withdrew from their 401(K) to pay their mortgage only to discover that they owed IRS for the penalty and taxes applicable to the amount withdrawn.  The penalty is 10% plus your tax rate of 20% or higher.

Question:   Since my 401(K) is exempt from bankruptcy do I have to declare it?

Answer:   Yes.  All exempt properties are part of the estate of the person filing bankruptcy.  The 401(K) and all properties of the debtor have to be declared in the bankruptcy petition.  The trustee could not touch or do anything on the debtor’s exempt property.  Only the non-exempt properties are subject to distribution to creditors.

Question:     I owe money to my 401(K) because I withdrew to pay for my emergency expenses.  If I file for bankruptcy, do I have to pay back my 401(K)?

Answer:      Yes.  You have to pay back your 401(K) based on your original loan agreement.

Question:    What similar plans are covered by the same provision as to exemption from creditors?

Answer:     Other plans which include 403(b), profit sharing and money purchase plan, SEP and SIMPLE IRA, and Defined benefit plan are also exempt from the reach of creditors when filing bankruptcy.

Note:   This is not a legal advice.

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