When you’re in debt, it can be overwhelming to think about tackling all owed funds at once. However, if you’ve exhausted all other options, you may want to consider filing for bankruptcy. Though it can negatively impact your credit, this option can provide much-needed financial relief to those struggling. However, one concern you may have regards your retirement account. If you’re wondering what happens to a 401(k) during a bankruptcy case, you’ll want to keep reading. Additionally, the following blog explores why you should connect with a Memphis, TN consumer bankruptcy lawyer who can help you explore your legal options during these difficult times.
Is My 401(k) Protected During Bankruptcy?
Under the United States Bankruptcy Code, certain debts are protected when filing for bankruptcy. These can be due to state or wildcard exemptions. However, some assets are protected based on the nature of the funds. For example, veteran benefits, alimony payments, social security, and crime victim settlements are considered protected funds that do not need a wildcard exemption to secure.
It’s imperative to understand that your retirement account is considered a protected asset during bankruptcy. As such, that money cannot be used to satisfy creditors. This is true for all Employee Retirement Income Security Act (ERISA) qualified plans, like a 401(k), 403(b), Roth IRA, or defined benefits plan. Because your retirement plan is not considered a part of your bankruptcy estate, you will not be required to utilize these funds to satisfy debts. As such, you can rest assured knowing that your financial future is still protected.
If I Wanted To, Could I Use These Funds to Pay Off Debts?
Though your funds are protected, meaning you do not have to use them to repay a debt, you may want to use these funds to satisfy creditors or reduce the amount of debt you have before filing. While this is possible, it may not be in your best interest to do so. This is because withdrawing funds from a retirement account early comes with a considerable number of tax consequences.
However, if you wish to do so, before filing Chapter 7, you may use retirement funds to repay one creditor. It is important to understand that you should not make this decision without first discussing the consequences and implications of doing so with an experienced attorney.
Unfortunately, the bankruptcy process can be confusing, so it’s critical to understand the importance of connecting with an experienced attorney as soon as possible if you wish to file. Working with someone who understands the laws and codes surrounding bankruptcy can help ensure you understand this process.
At the Arnold Law Firm, our team understands how overwhelming debt can be, which is why we are here to guide you through the process of obtaining relief. Connect with us today to learn how we can assist you during these matters.
