Retirement Benefits & 401k in Bankruptcy
The bankruptcy trustee has no more powers than any other creditor’s attorney that sued the debtor and that has a judgment. Retirement plans that are fully protected from creditors are likewise fully protected from the bankruptcy trustee.
If the debtor has a 401k the loan payment iit is excluded from his disposable income in the means test. The 401k loan repayment is also deducted and not calculated into his income for determining the plan payment.
But when the loan is paid off that income and the plan payment increases. It is important to be sure that the retirement plan is a qualified plan. All employer contributed plans such as 401k and 402b plans are qualified for exclusion from income calculations.
It is important for the debtor to show that he has a history of the contribution into the 401k or 403b prior to filing. The debtor cannot suddenly claim private school, charitable and retirement contributions the week before filing and have them allowed.
Many people may attempt to save their businesses or homes by cashing in their retirement in an effort to repay debts. However, they often eventually file and the money they cashed in from their retirement. They borrowed from relatives or received from refinancing their homes to repay creditors often becomes wasted. What often happens is that they will have to file bankruptcy anyway.
Rather than destroy your retirement, plan your bankruptcy early. Start these expenses early so that they can be deductions. Rather than repay creditors, place these funds into retirement accounts prior to filing so that you will have these allowed expenses. Every budget, even for persons in bankruptcy should include some form of savings and retirement. That is why Congress allowed and protected it as a necessary expense under §541 (b).