What happens to your 401k or IRA in bankruptcy can be an area full of anxiety for someone in financial trouble. After all, many people have a lot of money in these retirement accounts. Good for them, they have diligently saved for the day when they cannot, or do not, want to work anymore. Well Congress thought that saving in your 401k or IRA was a good thing as well, and has put protections in the bankruptcy code to help make sure that even if you file bankruptcy you will not lose your retirement savings.
To really understand how this works though, a little background is required. First we need to understand what happens to all of your property when you file bankruptcy. Basically everything you own gets put into the bankruptcy estate. Think of the estate as another entity or a company even. This new entity is controlled by the bankruptcy trustee. The trustee takes all of the property in the estate, which we now know is everything you used to own, and sells it to make money and pay off creditors. That sounds terrible I know. The good news is that not really everything you own becomes property of the bankruptcy estate. There are some types of property excluded from the bankruptcy estate, for example wages you earn after the bankruptcy petition is filed are not property of the estate. Read the rest of this entry »