Can the money in my 401k be seized in a bankruptcy for the debts if no other cash or assets are available?

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Question:

My credit card debt has grown so large over the years that I can’t handle it anymore and a debt management program doesn’t look like the best answer for me.  Now that I’m strapped with high, unexpected medical bills, I think I’m going to have to file for personal bankruptcy. However, I’m worried that the money in my 401K account at work might be seized to pay my bankruptcy debts. Can the court use that money to pay my creditors?

 

Answer: (1)

Your question implies that you will be filing for a Chapter 7 discharge of your consumer debts and is being answered in light of that assumption.

You’ll be pleased to learn that when the bankruptcy tax laws were changed back in 2005, Congress purposely exempted the funds in 401K, 403 (b), IRAs and other retirement accounts from the reach of bankruptcy creditors, with only a few exceptions.

You should seriously consider hiring a local attorney who can explain to you whether or not your personal 401K funds are exempt – and up to what dollar amount. (This exemption also usually covers funds in a traditional or Roth IRA).

Please be advised that the federal government included a provision in the Bankruptcy Code that lets the states decide whether or not they want to be governed by their own exemption laws or those of the federal government. Because of this provision, it’s doubly important for you to speak with an attorney to learn which exemption laws govern the funds you are asking about and what dollar amount can be exempted.

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