Hi, I will need to file for a chapter 7 due to divorce. I even lost my job. Question: I have $ 25,000 in
a 401 K Plan. Is this money protected or my creditors might take that money from me. What about an IRA? I have been told to transfer that money to an IRA to eliminate so many problems in terms of taxes if I am force to withdraw any of that money due to my job loss
401k's and IRA's are exempt in a Chapter 7 Bankruptcy.
Chapter 7 Bankruptcy Attorney
A proper 401(K) and/or IRS are exempt assets in a bankruptcy and should not be taken by a trustee or your creditors. However, if you transfer unexempt assets like cash on hand (not the 401(K)) into an IRA soon before filing, that could be a problem. Transferring your 401(K) into an IRA should not interfer with the exempt nature of the asset and should be ok. If you withdraw money from either the 401(K) or IRA, it is considered income to you and will be taxable. Also, if you liquidate the IRA or 401(K) into cash, it may not then be fully exempted in a bankruptcy. Speak with a local bankruptcy attorney before you take any action. We hate to see people make a mistake that easially could have been avoided by obtaining good counsel.
The response given is general in nature and based upon limited information. It does not and cannot replace that of a proper consultation with a qualified attorney. You should not act upon this Information alone, but should seek legal counsel prior to taking any action.
Your 401(k) or IRA will be protected as long as you exempt it properly in your bankruptcy paperwork.
Don't make the common mistake of withdrawing money from your retirement to try and pay off debts that your bankruptcy will take care of anyway. You'll lose the money without any benefit to yourself.
Chapter 7 Bankruptcy Attorney
If you must withdraw your 401k due to the job termination you can arrange for a direct rollover into the IRA to preserve your exemption from creditors..
Law Office of Jeffrey Solomon
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The questions and answers posted on AVVO are for general information and should not be treated as legal advice or establishing an attorney-client relationship.
You were not told to make a transfer from a 401k to an IRA by a bankruptcy attorney. If both accounts have been properly managed, both should be totally protected from the trustee and creditors. Do not seek or accept legal advice from non-lawyers.
Posting questions anonymously and receiving general answers do not substitute for consulting with an attorney licensed to practice in the jurisdiction in which you live. Answers posted here by Kevin C Gleason are only intended for general education of the public on legal matters. Please consult a qualified professional before deciding what to do about your situation.
Retirement account moneys are exempt from the claims of creditors.
R. Jason de Groot, Esq., 386-337-8239
I agree with the other answers indicating that your 401K account, if maintained in that manner, will be exempt. There are federal and state exemptions from the general rule that the bankruptcy trustee would take your property to pay off creditors. This is in keeping with the "fresh start" policy. You may need to roll over your 401K into an IRA becuase your employment has terminated. That is a different issues, but you need to make sure that you roll it over into a qaualified plan, otherwise you will lose your exemption for bankruptcy purposes and also owe money in taxes. You need to tread carefully since once you take the money, you will owe the taxes, and lose your exemption evenif you decide to invest in an IRA at a later date. While it is possible to file bankruptcy pro se, or on your own, the legal fee for bankruptcy filing is not typically high, and doing it correctly would be worth the money. I would suggest you retain a lawyer to file it for you.
Disclaimer: The information you obtain at this answer is not, nor is it intended to be, legal advice. You should consult an attorney for individual advice regarding your own situation. Review of this answer does not in any way constitute legal representation,