If you are under hard financial times and heavily in debt, you may have thought about the idea of filing for bankruptcy. After all, bankruptcy is a great way to get rid of all your debts, stop creditor harassment, and get a fresh start.
However, how bankruptcy works is a question that most Americans still don’t understand, especially when it comes to things such as your 401k.
Is My 401K Safe?
No matter if you filed for Chapter 7 bankruptcy or Chapter 13 bankruptcy, your 401k and other retirement accounts are safe. You will not lose a single penny from any your retirement accounts.
With Chapter 7 bankruptcy, you will have almost all your debts erased but are required to turn in all “nonexempt” forms of property.
Any property that is exempt (usually a house, car, or retirement savings) cannot be taken by the bank to repay debts.
The exemption status of certain properties varies by the laws of your state, so be sure to research what your state will allow you to keep vs. what you must turn over to your bankruptcy trustee.
Thanks to the Employee Retirement Income Security Act (ERISA), no 401k or other retirement accounts can be taken from you by the state. Almost all retirement plans, whether private or company sponsored are covered under this act.
Don’t Cash Your 401K Yet
During bankruptcy and in hard financial times, you may have pondered on the idea of cashing out your 401k. Know that once you withdraw the money and purchase assets or invest the money, it can be taken by the bankruptcy trustee to repay your creditors.
It is also important to note that you should not be moving a large amount of money prior to declaring bankruptcy. Many people take the cash in their bank account and put it all in their 401k, which is exempt from bankruptcy.
However, this is a massive red flag to the bankruptcy courts. If your bankruptcy trustee feels that you are attempting to hide or exempt a certain amount of money, you may have that property seized by the trustee and have its exemption removed.
Be sure to speak to a bankruptcy attorney first to ensure there will be no repercussions for moving money.
Filing for bankruptcy is a big step that can give you the fresh start that you desperately need. If you have questions about bankruptcy and want to speak to an attorney for free, CrediReady can help. Take two minutes to schedule a consultation with a free local attorney today by filling out this form.