401(k) and Bankruptcy
Many who file for bankruptcy qualify for protection of their 401(k), while
being able to discharge or eliminate debt. This is common concern debtors
have for a number of reasons. Some who are thinking about filing may receive
funds from their 401(k) as their only form of income, especially if they
are retired. Some may be struggling to pay bills such as credit card and
medical bills, and feel retirement accounts such as a 401(k) is their only asset and
would hate to see that go to creditors.
When you file for
bankruptcy many retirement accounts qualify for protection from creditors. Because
these funds are already designated for a specific purpose (retirement),
they are usually off limits to creditors. Yet, if you decide to pull the
funds for another reason, they may not be eligible for protection under
bankruptcy, depending on when the funds were pulled and for what purpose.
Another aspect to consider is the timing of your bankruptcy filing. Some
may think about seeking protection if they lost their job and are considering
pulling out funds from their 401(k) for living expenses. You may feel
you would need to move your 401(k) funds to another account in order to
protect them from creditors. In most cases this is unnecessary.
In some states you may obtain protection based on the
exemptions available. When you are able to protect your funds this means you get
to keep every last penny from creditors. This is also true even if you
have a considerable amount of debt.
Reference:
http://www.foxbusiness.com/personal-finance/2013/06/18/will-my-401k-be-safe-if-file-for-bankruptcy/