Is Your 401(k) Included in a Bankruptcy Estate?
The answer? It depends. Sorry. I know nobody wants to hear that answer. Most likely your 401k is safe in a bankruptcy, but only if it is “ERISA qualified” under the bankruptcy code. In most cases that will be true, and if so, the trustee cannot transfer your 401k into your bankruptcy estate and liquidate it for the benefit of your creditors. The National Bankruptcy Forum has a good explanation:
It depends on whether it is “ERISA qualified” under the meaning of section 541(c)(2) of the Bankruptcy Code. Section 541(c)(2) provides: “A restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable non-bankruptcy law is enforceable in a case under the Bankruptcy Code.” Why is a restriction on the transfer of a trust or account relevant? In part because it prevents the sale of the property in satisfaction of creditors claims outside of bankruptcy. Section 541(c)(2) simply carries this protection in to the bankruptcy world. In order to realize a dividend to distribute to creditors, the trustee would have to sell the trust or account. This is prohibited by the plain language of ERISA qaulified 401(k) accounts which do not allow for assignability or transfer while the property is held in trust. You can’t transfer it and keep it in its current tax exempt form and creditors can’t take it in satisfaction of their claim.
The important lesson for consumers is that your 401(k), if ERISA qaulified, does not become part of the bankruptcy estate. It is not subject to liquidation by the trustee and you will be able to retain it through the bankruptcy process.
If you have a 401k and you’re thinking of filing for bankruptcy, call us right away. We can check to make sure it is ERISA qualified and also look at your other assets to see how best to protect you. We’re the bankruptcy attorneys Knoxville trusts so call today to set up your free consultation.
