Will I Lose My 401k if I File for Bankruptcy?

Reaching the “golden years” is a milestone and most expect to spend them enjoying leisure activities after years of working. Many Americans prepare financially for this time through a retirement plan. A common form of a retirement plan is known as a 401k, which is offered by companies to their employees. It allows employees to make contributions, and employers will sometimes match a percentage of the amounts they put into the plan. As of September 2022, 60 million Americans were actively participating in this retirement option. 

Despite this responsible planning, however, unplanned circumstances can derail a sound financial future. One of those unfortunate circumstances is the need to file for bankruptcy. Data shows that the average peak year for filing bankruptcy is between 25 – 44 years old. Unfortunately, that means some people will file for bankruptcy before they can enjoy the money available to them in a 401k retirement plan. If you find yourself facing unmanageable debt and bankruptcy is the only option to regain control, it’s reasonable to worry about the effect this will have on your 401k. 

This article will cover how bankruptcy treats 401ks, understand 401k protection statutes, know what can put a 401k plan at risk, and whether or not contributions can be made to retirement plans during bankruptcy proceedings. 

Will My 401k Be Protected? 

The good news is that a 401k is mainly safe in bankruptcy chapters underneath the Employee Retirement Income Security Act (ERISA). The law was created in 1974 to protect the retirement assets of Americans, given their legitimate concerns at the time. People feared that their funds from private pension plans were being mishandled. 

A notable case that helped shape the ERISA was the Studebaker Corporation incident of 1963. In South Bend, Indiana the Studebaker car manufacturing plant shut down. Soon after, the company terminated the retirement plan for hourly workers and didn’t honor its obligations, thus illuminating the need for pension reform. Those most affected by the shutdown were employees who hadn’t reached retirement age. People who had worked for the company for as many as 40 years only received a lump-sum payment. That payment was worth 15% of the value of their original pension plan. In contrast, employees who were at retirement age received the full pensions.  

 Today, 401k’s, as well as other plans, are protected under ERISA, including:

  • 403b – A retirement plan for specific Code Section 501(c)(3) tax-exempt organizations and certain ministers and employees of public schools 
  • IRA – A long-term savings plan with tax advantages; people can use this for a retirement plan 
  • Keogh – A retirement plan for self-employed people; also used by those working for unincorporated businesses
  • Profit-sharing – This retirement plan gives employees a share of the company’s profits
  • Defined-benefit plan – A plan that provides benefits based on length of employment and salary history

There are two common bankruptcies that people file, which are chapters 7 and 13. Chapter 7 is a liquidation bankruptcy. A good choice for people who can’t repay their debts, this chapter will take assets to repay the creditors. However, creditors cannot access a person’s 401k to repay creditors. 

Chapter 13 is a repayment plan commonly referred to as a wage earner’s plan. The debtor’s monthly income will pay back the secured and unsecured debt over three to five years. However, the debtor’s 401k will not be considered an asset in their payment plan. 

What Can Put My 401k at Risk? 

Even though 401ks have good protections under the ERISA (the federal law that establishes minimum standards to protect pension plans in private industry), there are still circumstances that can leave a 401k unprotected. It’s important to know what those situations might be so that they can be avoided.


Unpaid taxes can put your 401k at risk. This is because the IRS has the power to seize your 401k or other retirement plans if there is an unpaid federal income tax. However, there is a silver lining. If you owe state or property tax, your 401k will be protected from seizure. 

Qualified domestic relations order

A qualified domestic relations order is a judgment for a retirement plan to pay child support, alimony, or property rights to a spouse, former spouse, or other dependent. That spouse or dependent is entitled to a percentage of one’s retirement plan. Bankruptcy does not discharge alimony or child support payments. Even if you file for bankruptcy, you’re still obligated to make those payments. 

Criminal fines and penalties 

The federal government can access your 401k to repay criminal fines and penalties. If you are in a civil or criminal case for mishandling your plan or committing fraud, you could be ordered to withdraw from the plan completely. 

Withdrawing funds 

Keeping your retirement fund for your golden years is important, especially if you face bankruptcy. Withdrawing funds could put your 401k at risk. The trustee could view this as an asset if money is taken out before its time to pay creditors or living expenses during bankruptcy proceedings.

Some factors contributing to losing the 401k protections are:

  • The amount taken out
  • If the funds were used for basic living expenses. There are other downfalls to using 401k money before retirement age, such as tax penalties, withdrawal fees, and losing interest over time. 

In bankruptcy cases, contributions made right before filing are also investigated. If lump sums of money were transferred into the plan, it could raise red flags that, in turn, could open the account to creditors to access for the bankruptcy. 

Given all of the pitfalls, thoroughly discussing your circumstances with an attorney is a good idea. A bankruptcy attorney can break down the protections for your retirement fund, and assess whether or not you risk losing it during your proceedings. 

Can I Make Contributions to My 401K During Bankruptcy?’

Being able to contribute to a retirement fund isn’t guaranteed. If you are considering contributing, whether you are allowed to or not, depends on the courts and your specific situation. If you are a chapter 7 recipient, the process will take four to six months to resolve. Once you are done with that bankruptcy chapter, you can resume contributions to a 401k. 

Chapter 13 takes years to compete. When you are bound by a repayment plan, the main focus is repaying the debt. Although necessary living expenses are considered in your budget when the repayment plan is created, voluntary retirement contributions are not considered a necessary expense. However, it doesn’t automatically rule out being able to contribute to your fund over the years. The best way to determine if a voluntary 401k contribution is doable in your situation is to seek legal advice. The attorney will evaluate the whole situation involving the courts, creditors, and repayment plan to decide if contributions are possible. 

Where to Find Help

Although retirement funds are largely protected under ERISA, knowing all the legal protections and potential risks is important. Having an attorney to advise you will help ensure you the best possible outcome for your bankruptcy case, including retirement fund security. At Rosenblum Law, there are dedicated attorneys who are ready to help you navigate the challenging bankruptcy process. Reach out and schedule a free consultation today.

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