Bankruptcy Attorneys in Minneapolis & St. Paul
You worked your whole life to save enough money for retirement through a 401(k.) It is understandable to worry about what will happen to your account if you are filing for bankruptcy. Fortunately, there is plenty of information about how bankruptcy affects your 401(k.)
Are The Funds Safe?
How safe your retirement fund is will depend on the type of bankruptcy filed. If you file for Chapter 13, you can rest easy. Your debt will be paid out of your disposable income over 3 to 5 years, and you get to keep all your property. That means that all your savings are safe.
If you file for Chapter 7, your 401(k) is safe if it is a plan that is qualified under the Employee Retirement Income Security Act. Most plans that your employer pays into qualify for this act, but you might want to ask your employer to make sure. These types of plans have transfer restrictions that can keep it out of the fund that your trustee can sell off to pay off your debt, and the courts have ruled that these transfer restrictions still apply during a bankruptcy. Any money that is in your 401(k) is safe under this rule. An experienced bankruptcy attorney will be able to know if the 401(k) is protected like this. For most Minnesotans, their 401(ks) are protected.
If your 401(k) does not qualify for the Employee Retirement Income Security Act, your savings could still be safe. Some states let you apply the federal exemptions under 5 U.S.C. §§ 8437(e)(g) and 11 U.S.C. § 541(c)(2). Fortunately, Minnesota is one of the states that allow this. These rules protect money in the thrift savings plan, and there aren’t any monetary coverage limits with it. So long as the money qualifies under these exemptions, they are kept out of the estate.
Another federal exemption is 11 U.S.C. § 522(n.) This protects all retirement funds that are tax-free under the Internal Revenue Code for up to $1,362,800 per person.
You (or your lawyer) will have to file a Schedule C document to the bankruptcy court in order to claim these exemptions. So long as you are filing as an individual or a married couple filing jointly, you could qualify for the exemptions.
The state will also let you exempt any employee benefits that qualify under ERISA and are necessary for support, but this exemption has a cap of $72,000 in present value. Your 401(k) may qualify, but you will probably want to talk to a lawyer.
Things That Will Endanger Your 401(k)
There are a few things that can threaten your 401(k.) One thing to remember is that the moment any funds from the 401(k) go in another, non-exempt, account, they lose the protection of the ERISA and other federal exemptions. It is best to leave alone any money that you have in your 401(k).
On the other hand, moving assets into your 401(k) right before you declare bankruptcy can look like fraud to your trustee, and your account can lose its exempt status if the trustee convinces the court that you are interfering with the bankruptcy process or trying to do something underhanded. It is a good idea to talk to your lawyer before making any transfers into or out of a 401(k.)
It should also be added that the exemptions generally apply to the individuals who earned the money in the account. According the 2018 Lerbakken v. Sieloff and Associates case, the exemptions aren’t transferred with the money should you have part of someone else’s 401(k) transferred to you.
Bankruptcy is complex, and expert legal help is critical to making it work for you. Contact Walker & Walker Law Offices, PLLC for more information.