When you file for bankruptcy in Michigan, you may worry about what will happen to your 401(k) or other retirement accounts, including whether you will have to use the funds in those accounts to repay your creditors in bankruptcy. A bankruptcy attorney can help you understand how bankruptcy proceedings may affect your retirement accounts.
Federal Protections for 401(k)s
Under federal law, a bankruptcy trustee or creditors cannot seize a debtor’s 401(k) or other retirement accounts. The Employee Retirement Income Security Act (ERISA) exempts qualifying retirement accounts from seizure to satisfy debts or liabilities. Examples of retirement accounts typically protected in bankruptcy include:
- Traditional 401(k)s
- Safe-harbor 401(k)s
- SIMPLE 401(k)s
- Simplified Employee Pension (SEP) plans
- SIMPLE IRAs
- Employee stock ownership plans
- Profit-sharing plans
Furthermore, the Bankruptcy Abuse Prevention and Consumer Protection Act also protects traditional and ROTH IRAs up to $1 million, with that amount increased every three years to adjust for inflation.
How Bankruptcy Affects 401(k)s in Michigan
Although the law exempts 401(k)s from seizure or liquidation during bankruptcy, filing for bankruptcy can still affect a debtor’s 401(k). For example, when a debtor files for Chapter 13 bankruptcy, they likely will not contribute to their 401(k) during their bankruptcy plan. Chapter 13 requires a debtor to turn over all their disposable income to the bankruptcy trustee. Furthermore, when a debtor receives retirement income from their 401(k), the bankruptcy court will consider that income in determining whether a debtor qualifies for Chapter 7 or the debtor’s disposable income for a Chapter 13 repayment plan.
Understanding Exempt vs. Non-Exempt Assets
During a Chapter 7 bankruptcy, the trustee can seize non-exempt assets and sell them to generate funds to pay a debtor’s creditors. However, a debtor can keep exempt assets during Chapter 7 and does not have to liquidate them.
In Michigan, debtors may choose to exempt assets under the federal exemption list or the exemption list under Michigan state law. Common examples of exempt assets include equity in a primary residence, equity in a vehicle, household goods, computers and electronics, tools of the trade, and household pets, up to a capped value. Debtors can also keep personal items like clothing, family pictures, prescribed health aids, and burial plots or rights.
Limitations on 401(k) Protections
However, the legal protections for 401(k)s and other retirement accounts have their limits. Examples of situations where a bankruptcy trustee or creditor may seize funds in your retirement account include:
- Unpaid Federal Income Tax – The IRS can seize funds in a retirement account when a taxpayer has unpaid federal taxes.
- Qualified Domestic Relations Orders – When a court divides a retirement account during divorce, an ex-spouse can file a qualified domestic relations order to become an alternate payee. Furthermore, a court may order a retirement account owner to withdraw funds for unpaid child or spousal support.
- Withdrawn Funds – If a person withdraws funds from their 401(k) account for any reason, they become subject to seizure.
Contact a Bankruptcy Attorney Today
When you file for bankruptcy, an experienced bankruptcy attorney can help you protect and preserve critical assets like your 401(k) or other retirement accounts. Contact Marrs & Terry today for a confidential consultation with our legal team to learn more about your rights and options.