Will I lose my 401(k) in bankruptcy?

Many people are on the fence about filing bankruptcy because they fear losing assets such as their house and car. They may also believe 401(k) accounts are at risk.

The good news: Many who file for bankruptcy keep their house, car and 401(k). In fact, even if you give up your house and/or car, perhaps because you choose not to reaffirm that debt, your 401(k) should still be yours.

The general advice is to keep money in the 401(k)

Of course, you may prefer to not have to file for bankruptcy at all. Thus, you may think, “I will take my 401(k) money out and use it to pay my debts.” That could be a mistake because now you have little or no retirement money, and maybe are still unable to pay all your debts. On the other hand, if you file for bankruptcy, you get to keep that 401(k) money and get your debt under control.

The thing to remember is that 401(k) money is safe in bankruptcy as long as it stays in the 401(k). In other words, if you took, say, $10,000 out to cover ordinary life expenses such as food and gas, that $10,000 could be free game for creditors to claim. (Money in accounts such as checking and savings does not have the same bankruptcy protections a 401(k) account does.)

Why courts want you to keep your 401(k)

Bankruptcy is not designed to “punish” anyone. Rather, it is a solution that helps people who have gotten in over their head financially due to medical expenses, credit card debt and other reasons. Courts know having money for retirement is a big contributor to staying afloat now and in the future, depending on your age.

Retirement is costly, especially as people live longer than before. It is critical you have as much money in your 401(k) as possible.

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