What Happens to Your 401k in Bankruptcy?
Your retirement accounts (401K, IRA, Roth-IRA) are totally excluded or “exempted” from your bankruptcy. In fact, the law is very clear that your retirement account “stays” yours in bankruptcy. Retirement accounts are a fundamental element of your retirement planning. Creditors have no power to force you to liquidate your 401K or IRA in bankruptcy. Usually, people make the mistake of voluntarily liquidating their retirement accounts to try to pay their bill. Big, big mistake. Usually, all that happens is you’re stuck with the income tax obligation on the amount you liquidated and end up in bankruptcy anyway. You actually have pay the income tax on the monies you liquidated, even if you have to file bankruptcy anyway. It is almost never a good idea to liquidate your retirement accounts because they are totally safe in bankruptcy.