If you’re considering filing for a Chapter 7 or Chapter 13 bankruptcy and 401(k) concerns are on your mind, you’re probably worried about preserving your hard-earned retirement savings on the other side of the process when you hope to restart your financial future.
It makes sense that you would want to be able to hold onto some assets as protected in order to not have to file for bankruptcy again someday. The good news is that federal bankruptcy law agrees with you, and your 401(k) and other similar properly-qualified Employee Retirement Income Security Act (ERISA) plans will be legally protected throughout bankruptcy.
For professional help, our bankruptcy lawyers in Houston can help you take on any retirement savings issues throughout your bankruptcy process.
Can My 401(k) Be Taken in Bankruptcy?
ERISA-qualified plans are for the most part protected from start to finish during bankruptcy, including from creditor claims, bankruptcy proceedings, and court judgments.
This follows a change to the Bankruptcy Code enacted by the federal Congress in 2005, which declares that any ERISA retirement accounts shall be fully-protected and excluded from the bankruptcy estate, including 401(k) plans, 403(b) plans, Roth and other IRAs, Keough plans, profit-sharing plans, money-purchase plans, and defined-benefit plans.
If I File Bankruptcy What Happens to My 401(k)?
In most cases, if you file bankruptcy what happens to your 401(k) is that it will not be affected by the bankruptcy. The reasoning behind this is that if your bankruptcy forced you to lose any retirement savings you had earned in order to pay off creditors, then bankruptcy could never truly offer a “fresh start” as Congress intended since you would have no money saved later in life and you might end up in dire financial straits again when you stopped working.
This would be good for no one – not you and not society at large – and so, Congress has carved out the protections of properly-qualified retirement accounts as detailed in this article.
Chapter 7 Bankruptcy and Your 401(k)
As we have discussed in our other informational articles, Chapter 7 bankruptcy, sometimes also known as “liquidation bankruptcy,” involves the placing of all nonexempt property into the bankruptcy estate, review by the trustee, and most of the time, a discharge of your debts. As part of this process, the court-appointed bankruptcy trustee sells your nonexempt assets and uses the proceeds of the sale to pay off your creditors.
So, can bankruptcy take 401(k)s away from filers under Chapter 7? Is an IRA protected from bankruptcy under Chapter 7?
While putting together the bankruptcy estate, both Texas State Law and federal law exempt nearly all retirement savings accounts. Therefore your 401(k) is protected in bankruptcy under Chapter 7. Also protected are your 403(b)s, profit-sharing, and money purchase plans, IRAs, and defined-benefit plans.
There is only one exception, a cap on IRAs which is currently around 1.3 million dollars. The bankruptcy IRA exemption cap amount is applied to any IRA accounts you maintain together in the aggregate, so if you have multiple Roth IRA accounts and bankruptcy is your plan, they will all be considered as one IRA for the purposes of the exemption.
Chapter 13 Bankruptcy and Your 401(k)
In Chapter 13 bankruptcy, sometimes called “reorganization bankruptcy,” you are allowed to keep your property and pay off some or all of your debts through a three-to-five-year structured repayment plan. In a Chapter 13 bankruptcy, you also get to keep your 401(k) and other ERISA-qualified plans.
So, if you file bankruptcy can you keep your 401(k) under Chapter 13? Are IRAs exempt from bankruptcy under Chapter 13? Yes! Because you get to keep your property in Chapter 13 bankruptcy, your 401(k), IRAs, and other tax-exempt retirement plans are protected, and you do not need to consider cash out retirement during Chapter 13 as these monies will remain safe.
Bankruptcy and 401(k) Withdrawal
The fact that a 401(k) is protected during bankruptcy means people can file without jeopardizing their retirement. As such, it is important to understand a few things you should not do with your 401(k) or other tax-exempt retirement accounts when thinking about bankruptcy, for these actions could jeopardize the safe status of your retirement accounts.
It is generally a bad idea to withdraw from a 401(k) or other retirement account or try to “cash-out” the account for any purpose since the money becomes income and is no longer exempt in your bankruptcy.
A second common mistake to be avoided is withdrawing from a 401(k) to pay off one or several debts as you sense yourself going underwater. Though this may seem like a good quick-fix solution, there is actually no need to waste exempt assets to pay debts that are likely to be discharged within just a few months of declaring bankruptcy. The better long-game strategy is to allow the bankruptcy process to run its course; and remember that all retirement savings, and IRAs up to the 1.3 million dollar cap, will not be considered as part of your assets.
Also, it is ill-advised to do anything that might look like a “preferential transfer,” where one creditor gets the benefit of being paid while the other creditors are thrust into the bankruptcy for court relief. In fact, if the bankruptcy trustee gets a sense that a preferential transfer has occurred, they may actually call back the monies from the creditor and place them into the estate.
Another bad move works the reverse way, and this involves “converting” your asserts from non-exempt to exempt status by making a deposit of money into a retirement account at or near the time of bankruptcy. This may be considered a type of fraudulent transfer. If the trustee believes you transferred property in order to hinder, delay, defraud, or shortchange your creditors, the exempt retirement savings may be drawn out and placed back into the bankruptcy estate.
Is an IRA Protected from Bankruptcy?
Yes! As discussed herein, ERISA-qualified plans are, for the most part, protected from start to finish during bankruptcy, including from creditor claims, bankruptcy proceedings, and court judgments.
Title 11 U.S.C. §522 (n)
Title 11 U.S.C. § 522 (n) is a section of the U.S. Bankruptcy Code that exempts around 1.3 million dollars in aggregate IRA funds under federal law. The current exact exempted amount is $1,362,800 as of April 1, 2019, and a new figure is expected to be released by the government on April 1, 2022.
If a Company Goes Bankrupt What Happens to My 401(k)?
Can a company take your 401(k) money? Generally, no. In addition to protecting your retirement savings in bankruptcy, the ERISA is a federal law that requires retirement plan assets to be held in a trust account, apart from an employer’s other business assets. Therefore, a partition is created which results in employers being prohibited from accessing 401(k) savings funds for their business operations, including the payment of creditors in the event that the company declares bankruptcy.
Experts do warn of two circumstances where the employer may fail to pay all the money entitled to you in your 401(k). The first circumstance could occur if the employer didn’t deposit your contributions before declaring bankruptcy, which is usually limited to a pay period’s worth of contributions. The second circumstance is when an employer match hasn’t been deposited into the trust fund, which could be a larger amount of money routinely matched monthly or even yearly. If the employer hasn’t made its matching contribution to the plan before bankruptcy, the employer’s match to your 401(k) could be lost.
As you can see, the answer to the question of what happens to my 401(k) if my company goes bankrupt depends to some extent on the practices of each employer, but employees can check their pay stubs to familiarize themselves with how the contributions are made and ask an HR representative when the matches occur. Where possible, choose a responsible employer who handles this area with care!
Our Bankruptcy Attorneys Can Help You Resolve Your 401(k) Issues
When you are trying to figure out how to navigate issues related to your 401(k) and bankruptcy, you will need a lawyer with specific experience on bankruptcy in Houston who has the right knowledge and resources to help you. Contact the Law Offices of Kretzer and Volberding P.C. online today to discuss your concerns.