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Bankruptcy and 401K Plans

It's natural to wonder how a 401k retirement account could be affected by filing bankruptcy. But when it comes to this type of plan, a Chapter 7 or Chapter 13 bankruptcy usually cannot take away any of these funds. That's because it is protected through the Employee Retirement Income Security Act (ERISA) under the United States Department of Labor.

But there are other aspects of 401k plans to keep in mind concerning retirement and bankruptcy.

401k Loans

Although you shouldn't lose any of the funds within the 401k by filing bankruptcy, there is a catch. If you take out a 401k loan, you are responsible to pay back 100 percent of the money. You can usually find the terms explained in the original loan document.

In short, this means that filing bankruptcy does not release you of the responsibility of paying back the loan. Furthermore, it could add a new burden to your financial circumstances. Monetary issues may become more stressful and complex due to paying back a 401k loan while also going through the bankruptcy process, incurring even more costs and fees.

401k Loans and Bankruptcy

Despite the risks, many people who file bankruptcy decide to take out a loan against their 401k balance. This often happens because the loans can be easy to get and the interest rate is generally low. Also, there is no credit approval process since the money belongs to you. Still, the funds from this loan must be paid back.

If you file a Chapter 7 bankruptcy on a 401k loan, this debt will not be eliminated. It doesn’t get included in the discharged amounts. A Chapter 13 filing, however, can help you create a payment plan that might help prevent any additional penalties.

Connect with a Lawyer Today

Before you decide to file bankruptcy and/or use your 401k to pay off any debt, you can connect with a sponsoring attorney near you for more information on your circumstances. Just fill out the form below for a no-obligation consultation with a lawyer in your area.