Qualified Retirement Plans and Bankruptcy
When people are considering filing bankruptcy, it is very common for them to be concerned about the retention of their assets.  Debtors frequently inquire whether they will be allowed to retain their retirement benefits, such as 401k accounts.  Many people have worked for many years to acquire these assets and do not want to lose them through the bankruptcy proceeding.  There is an exemption for qualified retirement plans, which means debtors will be allowed to keep their retirement benefits as long as they are qualified.  A qualified retirement plan’s definition under the United State Bankruptcy Code, Section 513.430.1(10)(f) is “any money or assets, payable to a participant or beneficiary from, or any interest of any participant or beneficiary in, a retirement plan or profit-sharing plan that is qualified under Section 401(a), 403(a), 403(b), 408, 408A or 409 of the Internal Revenue Code of 1986, as amended, except as provided in this paragraph.”
In a bankruptcy, 401(k) contributions are protected by ERISA (the Employee Retirement Income Security Act).  This generally means the Trustee will not be able to take your 401(k) proceeds, and the proceeds will be protected from creditors.  This applies only if the 401(k) account is still intact.  If the money has been removed from a 401(k) account and put into an unprotected account, such as a checking or savings account, there is no longer protection from the Trustee, who can then access the money and disperse to creditors through the bankruptcy.
Another common retirement plan option is a 403(b), which is exempt in a bankruptcy according to Section 513.430.1(10)(f).  This is a annuity that is available to certain organizations and non-profit agencies.  It is similar to a 401(k) and allows employees to contribute tax exempt until the employee withdraws from the plan.  Roth IRAs and 457 plans are also generally exempt through the bankruptcy.
The reason these retirement plans are generally protected from creditors is because there are usually restrictions on when and how these plans can be withdrawn.  There are usually limits on the age of the person and fees to withdraw from these accounts, as well as tax implications at the time of withdrawal.  Being able to keep these assets allows for debtors to plan for the future and withdraw from these accounts when they reach a certain age and/or retire so they have some form of income at that time.  If you would like more information about this matter, please contact a St. Louis or St. Charles bankruptcy attorney.