Bankruptcy and Retirement Accounts

4O1K and 4O3B Accounts

It is often that individuals struggling with significant debt have a retirement account at work. The most common account is what is known as a 4O1K and 4O3B accounts. Non-profit employers typically provide a 4O3B account. A question that comes up often is whether an individual filing for bankruptcy will lose their lifetime savings in on these retirement accounts.

Well, there is good news. Bankruptcy law has a safety net for people who need to save for old age (which means everyone) in the form of the Employee Retirement Income Security Act (ERISA).

ERISA qualified plans such as 401k, 403b and 457 plans are generally protected from being taken in a Chapter 7 bankruptcy. BUT you and your lawyer have to make sure your plan in qualified. Qualified plans must meet conditions such as:

  1. must offer Joint and Survivor benefits
  2. must have certain “vesting” rules- you must have full ownership after a maximum of 6 years.

How about IRAs and Roth IRAs?

Typically, employers do not contribute to IRAs or Roth-IRAs. Certain types of IRAs and Roth-IRAs are ERISA qualified and protected in bankruptcy as well. By providing a thorough discussion and examination of your account records will help you and your lawyer determine whether your IRA or Roth-IRA is ERISA qualified. After all, your bankruptcy trustee has the right to request this information and therefore you want to avoid a nasty surprise that can cost you your savings.

There are certain limitations that are too detailed to get into here so be sure to disclose everything to your bankruptcy lawyer so that each issue is addressed before filing.

In conclusion, your retirement accounts may be protected in a bankruptcy filing, but knowing what account you have is key to making sure you meet the strict guidelines laid out in ERISA laws. A thorough discussion with your bankruptcy lawyer will help answer your questions.

Joseph K. Githuku


Disclaimer: This article is provided for informational purposes only and should not be construed in any way as legal advice. This article does not create an attorney-client relationship. 


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