Can Bankruptcy Take Your 401(k)? Not Usually

If you are considering filing for bankruptcy and are concerned about losing your 401(k), here’s some good news: In most cases, retirement accounts are considered exempt. That’s thanks to the Employee Retirement Income Security Act (ERISA), a federal law that regulates 401(k)s and other types of employee benefit plans.

Typically, under ERISA, creditors are not allowed to touch your 401(k) when you liquify your assets in Chapter 7 bankruptcy. Likewise, your 401(k) cannot be tallied among your assets when creating a Chapter 13 repayment plan.

That said, it pays to be informed about when your retirement accounts could be affected by a bankruptcy filing.

What plans are protected in bankruptcy?

ERISA requires your employers to hold your retirement funds in a trust. Because that trust isn’t accessible to you (without having to pay a penalty) until you reach age 59 1/2, ERISA keeps your retirement safe from creditors.

To qualify for ERISA protection, your retirement plan must be:

• Set up and managed by your employer or an associated employee organization.
• Follow specific rules involving how it’s funded and vested.
• Be a “defined contribution plan,” or one into which either an employer, an employee or both make regular contributions.

According to the U.S. Department of Labor, the government considers the following types of retirement savings accounts defined contribution plans and thus eligible for ERISA protection:

• Traditional 401(k)s
• Safe harbor 401(k)s
• SIMPLE 401(k)s
• Automatic enrollment 401(k)s
• Simplified Employee Pension Plans (SEP)
• SIMPLE IRA plans
• Employee stock ownership plans (ESOP)
• Profit-sharing plans
• Certain 403(b) plans

In addition, ERISA protects many employee health and welfare benefit plans such as health reimbursement arrangements (HRAs), flexible spending accounts (FSAs) and dental and vision plans. Some cash balance plans and defined benefit plans may also qualify.

ERISA does not protect traditional IRAs or Roth IRAs from creditors. These plans still have protection in case of bankruptcy, though. Traditional and Roth IRAs are protected under the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). This law extends federal protections to both types of IRAs up to a certain amount once you’ve filed for bankruptcy. BAPCPA does not apply to IRAs before a bankruptcy filing has been made. Some states may also have additional protections from assets held in IRAs.

Typically, the amount BAPCPA protects changes every three years, based on inflation. Through March 31, 2025, the BAPCPA aggregate bankruptcy exemption has been capped at $1,512,350 for IRAs. That means the law will protect up to $1,512,350 spread across multiple accounts.

When your 401(k) may not be protected

There are several scenarios in which ERISA may not protect your 401(k) from creditors. As you can see in the examples below, these situations are not necessarily connected to a bankruptcy filing.

You owe federal income tax

The IRS may seize your 401(k) or other retirement accounts if you have unpaid federal income tax and associated fees. However, your 401(k) will likely still be safe if you owe state income or property taxes.

Your ex-spouse submits a qualified domestic relations order

A former spouse, current spouse or a dependent may submit a qualified domestic relations order. In this case, your ex-spouse or dependent will be entitled to a percentage of your retirement plan. If you have unpaid child support or alimony, you may also be required by the court to withdraw funds from your retirement accounts — even if it means paying additional penalties or fees.

You owe criminal fines and penalties

Your 401(k) or other retirement savings could be used to pay for federal criminal fines and penalties. This is similar to any unpaid income tax. In addition, your 401(k) could be seized if you have been found guilty of fraudulently depleting your 401(k)’s assets.

You have a 403(b) plan

ERISA may not protect 403(b) plans. These plans are commonly known as “tax-sheltered annuity plans” and are offered by public schools and certain tax-exempt organizations.

ERISA accounts in bankruptcy

Your 401(k) and certain other retirement accounts aren’t liquid assets. Because they can’t be sold like a savings account or extra car, they can’t be used to pay back your debts during bankruptcy.

While your 401(k) is safe, if you file for Chapter 13 bankruptcy, you likely won’t be able to contribute to your account until you’ve paid off your repayment plan and your bankruptcy case is discharged. In most cases, all your disposable income must go toward paying your creditors when a Chapter 13 plan is in place. Some states do allow you to make retirement contributions, but you should consult your bankruptcy attorney to be sure.

If you already receive retirement income from a 401(k), it will be considered during bankruptcy. Under BAPCPA, your disposable income — even from retirement savings — may count against you in a Chapter 7 bankruptcy means test. In other words, your income sources may add up to disqualify you from filing for this type of bankruptcy.

What happens to your 401(k) if you file bankruptcy during retirement

Although the goal in retirement is to have enough money stashed away to cover your living expenses, life doesn’t always go according to plan. Many seniors face high medical bills, credit card debt or insufficient retirement funds. On these occasions, filing for bankruptcy might offer some debt relief.

Any funds you have in 401(k) accounts during retirement are generally protected under ERISA. Similarly, BAPCPA still protects funds put away in IRAs.

Work with a bankruptcy lawyer to learn which assets can be exempted from a bankruptcy case. Every state has different laws that affect how your assets are handled in bankruptcy. For example, you might work with a bankruptcy lawyer to find ways to keep your home. A reputable bankruptcy lawyer can also advise you about other assets protected in the case of bankruptcy, such as your Social Security benefits.

The bottom line

If you’re considering filing for bankruptcy, your 401(k) retirement funds are one less thing to worry about. Thanks to ERISA, this type of account is protected from creditor claims.

That said, it’s always a good idea to work with a reputable bankruptcy attorney who can advise you on how to handle your assets in this tricky situation. After all, having funds in or withdrawing from a 401(k) may impact your ability to file for Chapter 7 bankruptcy. A 401(k) may also affect your debt repayment in a Chapter 13 filing.

Frequently asked questions

• Can you use your 401(k) to pay a creditor?
  

  Yes, but you will face some financial consequences. If you have an active 401(k), a better option would be to get a 401(k) loan, especially if you are below the age you can make penalty-free withdrawals.

  In most cases, if you withdraw funds from your 401(k) before reaching the age of 59 ½ years old, you will have to pay income tax on the amount withdrawn, along with a 10% early withdrawal penalty. The taxes and penalties are taken directly from the withdrawn funds.

  That said, the SECURE 2.0 Act allows 401(k) owners to make a one-time penalty-free withdrawal of up to $1,000 from their account. This amount must be repaid within three years. In addition, the IRS allows 401(k) owners to withdraw funds from their plans without paying penalties in the case of serious financial hardship. However, debt situations do not usually qualify. The criteria include having to pay for medical or burial expenses, as well as covering the costs of a home repair after a natural disaster.

  If withdrawing money from a 401(k) to satisfy a creditor, do it at least 90 days before filing for bankruptcy to avoid complications with your filing.

   

• What types of retirement accounts are protected from creditors?
  

  ERISA protects several types of retirement plans from creditor lawsuits, as well as bankruptcy rulings. These protected plans include 401(k)s, pension plans, health and welfare benefit plans and profit-sharing plans. ERISA does not protect 403(b) plans or IRAs.

• Does ERISA protect my 401(k) against creditor lawsuits?
  

  In most cases, ERISA protects eligible retirement plans from creditor lawsuits, as well as bankruptcy.

  However, if the federal government brings about a lawsuit for unpaid taxes or court-ordered fines and penalties, your plan will not be protected by ERISA. In addition, if an ex-spouse has received a qualified domestic relations order, ERISA will not protect your 401(k) from a related lawsuit.