True or False: A 401K is protected in bankruptcy?

true falseLike most legal questions, the answer is “it depends.”

If the 401K was established appropriately, it can way qualify under the bankruptcy code as exempt.

That is not the end of the analysis, however. If you have taken money out of your 401K – either in the form of a loan or a withdrawal – that can have serious repercussions in bankruptcy.

If money is withdrawn from a retirement account and moved into a regular bank account, another investment vehicle, or stuffed under the mattress, it may lose its exemption to seizure by creditors and its protection in bankruptcy.

If money is borrowed from a 401K, the loan repayment expense may or may not count as a valid expense within a bankruptcy case. This can increase the amount of “disposable income” the court considers and can have a huge impact on your bankruptcy case.

In addition, there are a number of uses for borrowed 401K money that are not permitted under the tax code. Using money for one of those purposes (purchasing a business for example) can serve to eliminate the exemption from the entire account.

A knowledgeable bankruptcy attorney can help you avoid potential pitfalls and advise you as to how to deal with any issues with your 401K or other investment and retirement accounts.

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