Bankruptcy, 401k and You: How Bankruptcy May Affect Your 401k Retirement Savings

One of the primary concerns most individuals have about declaring bankruptcy is what they could lose.  Often clients ask if their 401k’s will go to creditors if they declare bankruptcy.

If you live in Florida, your 401k is protected in two different ways. In fact, if you file for either Chapter 7 (a dissolution) or Chapter 13 bankruptcy (a reorganization), in most cases your retirement plan money will be safe from your creditors.

Individual Bankruptcy Background

Before we get into whether or not you can declare bankruptcy and still keep your 401k, let’s review the basics.

When you declare bankruptcy, most of the property you own becomes part of the bankruptcy estate. However, some property never becomes part of the bankruptcy estate. Even if property would be considered part of the bankruptcy estate otherwise, in many cases it is protected by federal or state exemptions.

In a Chapter 7 bankruptcy, the trustee cannot sell property for the benefit or creditors if that property is not part of the bankruptcy estate or is exempt. Neither can such property be taken account when calculating how much you must repay creditors in a Chapter 13 bankruptcy.

Fortunately for those declaring bankruptcy, there are many exemptions. Many people lose no property at all when they declare a Chapter 7 bankruptcy. Of course, that depends on your individual circumstances.

Most 401ks Are Not Property of the Bankruptcy Estate

Under federal law, retirement accounts qualified under the Employee Retirement Income Security Act (ERISA) are generally not part of the bankruptcy estate. Once again, that means the trustee has no control over them and cannot use the funds to pay your creditors. ERISA-qualified accounts are not taxable and are protected from creditors by transfer restrictions. To be clear, an ERISA-qualified 401k can’t be used to pay your creditors under federal law.

Is your 401k ERISA-qualified? As it turns out, it really doesn’t matter, because Florida exemptions protect you.  Read on.

Florida Exemptions Protect 401k’s

Some states allow those who declare bankruptcy to choose between exemptions established under federal law and those established under state law. But in Florida, you must use the Florida exemptions if you qualify.

Section 222.21(2)(a) of the Florida statutes is clear that no matter what federal law says, 401k’s are exempt. For that matter so many other types of retirement accounts such as 403b accounts, SEP and simple IRAs, inherited IRAs and Roth IRAs (up to $1,362,800 per person as of June 2021) among others.

Though all tax-deferred retirement plans are protected under the above section of Florida law, other sections of the law specifically mention exemptions for pension plans for teachers, police officers, firefighters, county officers and employees, and state officers and employees.

Not Everyone on Florida Can Use Florida Exemptions

This is a bit confusing, but the residency requirement for filing bankruptcy in Florida is not the same as the residency requirement for using Florida exemptions. You may file bankruptcy in Florida if you have lived here for more than 180 days (or the greater portion of 180 days prior to filing).

But to be allowed to use Florida’s exemptions, you must live in Florida for 730 days before you file bankruptcy. But you aren’t left out in the cold. If you cannot use Florida exemptions, you can still use the exemptions of the state where you lived just before moving to Florida. Your 401k is more than likely safe, and as stated earlier, it is protected under federal law if it is ERISA-qualified.

Money Withdrawn Is Another Story

Finally, it’s important to know that your 401k money is only protected as long as it’s in your 401k account.  Once you withdraw money from any protected retirement account, it’s no longer protected in bankruptcy.

Don’t Lose Your Retirement: Know Bankruptcy 401k Effects

If you have questions about how bankruptcy will affect your 401k or any retirement account, don’t hesitate to contact us for a free consultation.

The experienced attorneys at Ziegler Diamond Law: Debt Fighters are happy to advise you. Contact us for a free consultation by submitting this form. Or just call us directly at (727) 538-4188 in Clearwater, (813) 225-3111 in Tampa or (352) 600-1326 in Mt. Dora.

Michael Ziegler Managing Partner

Michael Ziegler is the managing partner of Ziegler Diamond Law, serving consumers throughout Florida. With a focus on consumer protection, Michael helps clients navigate bankruptcy, defend against debt collection lawsuits, and address credit reporting errors. Known for his strategic approach and dedication to empowering individuals to regain financial control, Michael also chairs the Clearwater Bar Association's Small Firm section. Outside the office, he enjoys camping with his family and pursuing real estate ventures.

See Full Bio