People are concerned about what they might lose if they declare bankruptcy. Clients often ask if the 401k they have will be given to creditors if it is declared bankrupt.
Your 401k can be protected in two ways if you reside in Florida. You can file either Chapter 7 (a dissolution) or Chapter 13 (a restructuring) to protect your retirement plan money from creditors.
History of Individual Bankruptcy
Let’s first review the basics before we dive into whether you can declare bankruptcy while still keeping your 401k.
Most of your property becomes part of the bankruptcy estate when you declare bankruptcy. Some property does not become part of the bankruptcy estate. Although the property may be included in the bankruptcy estate, it is often protected by state or federal exemptions.
If the property is not exempt from bankruptcy or is not included in the bankruptcy estate, the trustee cannot dispose of it for creditors’ benefit. These properties cannot be included in the calculation of how much you have to repay creditors in Chapter 13 bankruptcy.
There are many exemptions available to those who declare bankruptcy. Many people do not lose any property when they file Chapter 7 bankruptcy. It all depends on your personal circumstances.
The Majority Of 401ks Are Not The Property Of The Bankruptcy Estate
Federal law generally states that retirement accounts, which are subject to the Employee Retirement Income Security (ERISA), are not considered part of the bankruptcy estate. This means that the trustee does not have control over these funds and cannot use them to pay creditors. ERISA-qualified accounts do not have to be taxable. They are also protected against creditors by transfer restrictions. Federal law states that a 401k qualified by ERISA cannot be used to pay creditors.
Is your 401k ERISA qualified? It doesn’t really matter because Florida exemptions protect your assets. Continue reading.
Florida Exemptions: Protect 401k’s
Some states allow bankruptcy filers to choose between federal and state exemptions. If you are eligible, however, you will need to use Florida’s exemptions.
The Florida statutes, Section 222.21(2) (a) make it clear that 401ks are exempt from federal law. There are many other retirement accounts available, including 403b accounts and SEP accounts.
All tax-deferred retirement plans in Florida are protected by Florida law. However, there are exemptions for certain pension plans that teachers, firefighters, police officers, county officers, and employees.
Florida Exemptions Are Not For Everyone
It is confusing to say that the residency requirement to file bankruptcy in Florida does not apply to the residency requirement for Florida exemptions. If you’ve lived in Florida for 180 days or more, you may file bankruptcy.
To be eligible to use Florida’s exempts, however, you must reside in Florida for at least 730 days prior to filing bankruptcy. You are not left out. You can still apply for the Florida exemptions even if you are unable to use them. Your 401k is most likely safe and protected by federal law if it’s ERISA-qualified.
Money Withdrawn Is A Different Story
It is important to remember that your 401k money will only be protected as long it remains in your 401k account. You can’t take money out of any protected retirement account.
Do Not Lose Your Retirement: Learn about Bankruptcy and 401k Effects
For a free consultation, contact us if you have any questions about bankruptcy and how it will impact your 401k or other retirement accounts.
This post was written by Trey Wright, a highly sought after bankruptcy lawyer in Brunswick Ga! Trey is one of the founding partners of Bruner Wright, P.A. Attorneys at Law, which specializes in areas related to bankruptcy law, estate planning, and business litigation.
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