Many Seattle residents may be under the impression that, if they were to file for bankruptcy, many of their assets would be liquidated or lost through the process. In some cases, this is true; but every bankruptcy is unique, and there are few guarantees about what will or won’t be lost in a Chapter 7 bankruptcy filing.
However, there are certain items that are exempt from the bankruptcy process. One such exemption is a 401(k) retirement account, which is a protected asset. The money in that account cannot be targeted through the bankruptcy process.
Herein lies the big factor with 401(k) retirement accounts and bankruptcy: the money is only considered a “protected asset” if it remains in that account. Any money that is taken out of that account and then placed in a different bank account (say your regular checking or savings account) makes it an “unprotected asset.” Unprotected assets can be lost during bankruptcy.
So remember that it is dangerous to remove funds from your 401(k) during bankruptcy. If you really need to tap your retirement account, consult your bankruptcy attorney so that you have all the information you need up front before making that decision.
Chapter 7 bankruptcy can be a very helpful process for many people. Though it does have a reputation of being a daunting and painful life event (and we aren’t saying those things are false), a bankruptcy filing can help you get out of debt and, in the long run, get you to a happier place in your life.
Source: FOX Business, “Will my 401(k) be Safe if I File for Bankruptcy?,” Justin Harelik, June 19, 2013