What Will Happen To My 401K If I File For Bankruptcy?
Chapter 7 Bankruptcy
In a Chapter 7 bankruptcy, the filer’s non-exempt assets are pooled together to form the bankruptcy estate, which is subject to the jurisdiction of the bankruptcy court and can be accessed to pay creditors.
Federal Bankruptcy Code Protects 401k
Almost all 401k plans have an anti-alienation clause that excludes them from the bankruptcy estate. In addition, the federal government prevents 401k funds from being included in the bankruptcy estate. In 2005, the federal bankruptcy code was amended, and it now provides bankruptcy protection for all 401ks in all states up to $1,000,000. The provisions of this reform went into effect October 17, 2005. Unlike most of the other provisions of the federal bankruptcy exemptions, the 401k is always protected, even if the state does not allow use of the federal bankruptcy exemptions.
Employee Retirement Income Security Act of 1974 (ERISA)
Federal law (specifically, the Employee Retirement Income Security Act of 1974) prescribes the minimum standards for most of the private industry’s pension plans and health plans that are established voluntarily. This act provides protection for individuals in these plans. ERISA falls under the purview of the U.S. Department of Labor. It protects your 401k if you file for bankruptcy. However, even under a Chapter 7 liquidation, the debtor’s 401k will be protected for up to $1,000,000 in value.
401k Loans Exempt from Bankruptcy
Loans against your 401k are not considered by the bankruptcy judge during a bankruptcy proceeding. Because they are loans with money you have already earned as collateral, they are not in the same category as other loans, according to LoanSafe.org. If you file for bankruptcy, you are still obligated to repay a loan against your 401k. However, if you filed Chapter 13, you may be able to work out a payment plan where you do not accrue penalties. Unlike most of the other provisions of the federal bankruptcy exemptions, the 401k is always protected even if the state does not allow use of the federal bankruptcy exemptions.
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