If you already have a 401K plan you will be happy to know that for the most part, your 401k and other qualified retirement accounts are safe when you file bankruptcy. If you want to learn more about how to keep retirement benefits and your 401K in bankruptcy, you are invited to continue reading.
Protecting Your Retirement Benefits & 401k in Bankruptcy
Accounts that provide protection include 403(b)s, profit-sharing, and money purchase plans, IRAs, and other defined-benefit plans. Therefore, because federal law protects these accounts from creditors and the bankruptcy trustee, cashing in a 401K to deal with debt is almost always a bad idea.
It’s also worth noting that the bankruptcy trustee has no more power than any other creditor’s attorney that’s suing the debtor. In other words, retirement plans with full protection from creditors also have full protection from the bankruptcy trustee.
However, it is important to ensure that your retirement plan qualifies for this protection.
⎆ 401K loan repayments are deductible.
Interestingly, the means test also excludes a 401k loan payment. Additionally, the 401k loan repayment is also a deduction and not a calculation for income in determining the plan payment.
But, be aware that when the debtor pays the loan in its entirety, it increases the debtor’s income, therefore, the plan payments increase.
⎆ The wrong ways to use your retirement benefits.
Poor money management issues arise when people attempt to save their businesses or homes by cashing in their retirement in an effort to repay debts. However, they often eventually file bankruptcy and the money they cash in from their retirement is lost. Some people try borrowing from relatives or refinance their homes to repay creditors. Again, that money is also lost when they eventually end up filing bankruptcy anyway.
Rather than destroy your retirement, a way to avoid this is to plan your bankruptcy early. Planning your bankruptcy early gives you and your attorney the time necessary to plan a successful bankruptcy.
⎆ You must show a history of contribution to retirement benefits.
It’s also important for the debtor to show that prior to filing, he has a history of contribution to the 401k or 403b. In other words, the debtor cannot suddenly claim private school, charitable, and retirement contributions the week before filing.
Again, to protect these funds, you must start these plans earlier than later. Then, rather than losing all your income to creditors, you have a history prior to filing the bankruptcy of placing these funds into retirement accounts.
The fact remains, every budget, even for persons in bankruptcy, should include some form of savings and retirement. That’s why Congress allows and protects it as a necessary expense under §541 (b).
If you are facing bankruptcy, don’t delay because timing is crucial. I am here to help you. So, contact my office right away to start the conversation. Nick C. Thompson, Bankruptcy Lawyer: 502-625-0905