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Your 401(k) when filing for bankruptcy in Tennessee

On Behalf of | Aug 30, 2021 | Chapter 7 Bankruptcy |

Tennessee residents filing for bankruptcy know how stressful the process can be. There are lots of questions about which assets and accounts will be impacted by the bankruptcy claim, including your 401(k) and other retirement accounts.

Thankfully, retirement accounts are, more often than not protected, in a bankruptcy case unless you start moving them around. Once you start pulling money out of your retirement account and putting it into a checking account or another investment account, there can be problems.

How are retirement accounts protected?

Retirement accounts like 401(k)s are protected, meaning they can’t be seized or sold off during the bankruptcy period. This means that even after the bankruptcy has gone through, you’ll still have your retirement account in your name.

Most 401(k) accounts are considered exempt in bankruptcies because, in most scenarios, you are not getting income from retirement accounts. If you are, the amount of income you’re getting from your retirement account is taken into consideration when you file for bankruptcy.

Are all retirement accounts protected?

Not all retirement accounts are protected or exempt in Chapter 7 bankruptcy. There’s only a certain amount that can be protected.

In addition, any generalized savings or investment accounts are not considered retirement accounts even if you were planning to use them to retire. As a result, these accounts can still be seized during the bankruptcy process.

Should I dip into my retirement to settle my debts?

Unless your debt is less than the sum of your retirement accounts, it’s not a good idea to use your retirement account to pay off your debt. If your debt is larger than what you have in retirement or just barely allows you to break even, then odds are you’ll still need to file for bankruptcy at some point.

Using your retirement account to catch up on debt will also leave you short down the road when you actually need your retirement account. It’s important to leave yourself as protected as you can during the bankruptcy process, so talk to a lawyer or accountant before making any hasty decisions.