If you are filing for bankruptcy, one of the many questions you likely have is what your future holds. If you contributed to a retirement account for years, it is common to be concerned about what exactly will happen to your 401(k) after bankruptcy. Fortunately, in most cases a 401(k) account, and other retirement accounts, are safe from the bankruptcy process.
How bankruptcy impacts your retirement account depends on the type of bankruptcy for which you file. Either way, though, they’re protected. Consider the difference between the following:
- Chapter 7
In this type of bankruptcy, most or all of your debt may be eliminated. Any property that is not classified as exempt must be turned over to a bankruptcy trustee who will sell these assets and use the proceeds to pay off creditors. Under federal law, most tax-exempt retirement accounts are exempt in the bankruptcy process. This holds true whether a person uses state or federal bankruptcy exemptions. As a result, investments such as 401(k)s, IRAs, and many other defined-benefit plans are protected during the bankruptcy process.
- Chapter 13
In this type of bankruptcy, you are permitted to keep your property and pay off either some or all of your debts through a repayment plan. Since a person can hold onto his or her property during Chapter 13 bankruptcy, retirement accounts are protected.
What Not to do With Your Retirement Account
The protected nature of 401(k) accounts means that many people can file for bankruptcy without jeopardizing their retirement savings. There are a few steps that you absolutely must avoid while filing for bankruptcy.
- Do not cash in your 401(k). As soon as you withdraw assets from a 401(k) and place the assets into another type of account, the 401(k) will lose its exempt status. As a result, you must avoid cashing in your 401(k) until it is absolutely necessary.
- Do not use your 401(k) to pay off debts. Some people cash in 401(k) accounts to use the funds to pay off their debt. This is not a good idea. A person who does this can expect to pay penalties for withdrawing these funds early.
- Do not move a lot of money before declaring bankruptcy. Some people believe that it is a beneficial to place non-exempt assets into a retirement account before declaring bankruptcy. If you do this, you risk losing the exempt status of this property. In the worst-case scenario, you also risk a court believing that you committed fraud and refusing to discharge your debts in bankruptcy.
Speak with a Knowledgeable Ohio Bankruptcy Lawyer
Many questions that arise during the bankruptcy process can be addressed by an experienced bankruptcy attorney. Call Dworken & Bernstein today at 440.946.7656 or 216.861.4211 to schedule a free case evaluation.