If you are filing for Chapter 7 or Chapter 13 bankruptcy in NJ
, you may wonder how it will impact your retirement savings. Generally, your 401(k) and other qualifying retirement accounts are exempt from bankruptcy proceedings. Federal law protects these retirement accounts no matter how you file for bankruptcy. Keep reading for details about how the law works.
In a New Jersey Chapter 7 bankruptcy, you can dispense most or all of your debts through forfeiting property and assets to the bankruptcy trustee, who can then use the profits from selling these items to pay off your creditors.
A Chapter 13 bankruptcy allows you to keep your property and pay off your debts on a repayment plan over a designated period of time. You must meet specific requirements for Chapter 7 bankruptcy, while almost anyone can file for Chapter 13 bankruptcy. Despite these differences, both Chapter 7 and Chapter 13 bankruptcy affect your 401(k) just the same—it cannot be touched.
Federal law allows debtors to exempt any tax-exempt retirement accounts
during a bankruptcy. This includes 401(k)s, 403(b)s, IRAs, defined-benefit plans, and profit sharing and money purchase plans. For the most part, the exemption amount on these accounts is unlimited, meaning you can keep the entire amount in the account even if you file for bankruptcy. These federal laws allow you to keep these assets during Chapter 7 bankruptcy, while under Chapter 13 bankruptcy, you are allowed to keep all of your property and assets while agreeing to a repayment plan of your debts.
If you are potentially facing bankruptcy, it can be tempting to use the money in your 401(k) to deal with your debts. But because this money is protected during a bankruptcy proceeding, it is not advisable to use it to dig yourself out of debt. You will normally have to pay high penalties for withdrawing your funds early. If you are using this money to pay debts that could be discharged anyway, you might just be prolonging the inevitable. Once you take money out of your 401(k), the 401(k) will lose its exemption status.
Additionally, it's not advisable to move your money around a lot before filing for bankruptcy. It might seem like a good idea to move nonexempt assets, like money in a bank savings account, into an exempt account—like your 401(k)—before you file for bankruptcy. It is important to talk to a bankruptcy lawyer prior to moving any
money. If there is any reason for a bankruptcy trustee to think that you specifically transferred money into your 401(k) in order to in some way shortchange or avoid paying a creditor, you might lose your exempt status on your 401(k). Even worse than this, if the court finds that you have engaged in fraudulent activity with your 401(k), they can refuse to grant you a bankruptcy.
If you are considering filing for bankruptcy in NJ, it is important to sit down with an attorney that can explain all your options. Before you move any money in or out of your 401(k), Veitengruber Law
can advise your best path forward. Just because you are experiencing financial difficulty now, doesn’t mean your financial future has to look bleak too.