Can They Take Your 401(k) If You File Chapter 7?

Filing for Chapter 7 bankruptcy provides individuals with a mechanism to gain a financial fresh start by discharging most unsecured debts. This liquidation process involves a court-appointed trustee who oversees the sale of non-exempt assets to repay creditors. While the prospect of losing property can be concerning, a common question arises regarding the safety of retirement savings, particularly 401(k) accounts, during this difficult time.

Federal Protections for Retirement Accounts

A primary federal law, the Employee Retirement Income Security Act of 1974 (ERISA), provides substantial protection for many employer-sponsored retirement plans, including 401(k)s, in bankruptcy. It ensures that funds are held in a separate trust, distinct from the employer’s business assets, making them generally inaccessible to creditors. Most 401(k) accounts are typically excluded from the bankruptcy estate, preventing them from being liquidated to pay debts. The anti-alienation clause within ERISA plans shields these funds from creditors. As a result, 401(k)s, along with other qualified plans such as 403(b)s and pension plans, receive unlimited protection in bankruptcy.

State Exemption Laws

While ERISA broadly covers employer-sponsored plans, state laws also play a significant role, particularly for retirement accounts not covered by ERISA, such as Individual Retirement Arrangements (IRAs). The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) introduced federal protections for IRAs. Under BAPCPA, traditional and Roth IRAs are protected up to a certain limit. As of April 1, 2025, this federal protection for traditional and Roth IRAs is capped at $1,711,975.

However, Simplified Employee Pension (SEP) IRAs and Savings Incentive Match Plan for Employees (SIMPLE) IRAs, similar to employer-sponsored 401(k)s, generally receive unlimited protection under federal bankruptcy law. Funds rolled over from a qualified employer-sponsored plan into an IRA also typically retain unlimited protection from creditors. Inherited IRAs generally do not receive the same creditor protection in bankruptcy as personally-funded retirement accounts.

Circumstances Affecting 401(k) Protection

Despite general protections, certain situations can affect the safety of 401(k)s in Chapter 7 bankruptcy. If funds were transferred into a 401(k) account shortly before filing for bankruptcy with the intent to defraud creditors, these contributions might not be protected.

Additionally, outstanding loans against a 401(k) are not typically discharged in bankruptcy, as they are considered a loan from oneself rather than a traditional debt. Repayment obligations for these loans continue even after bankruptcy filing, and their existence can influence a debtor’s eligibility for Chapter 7. Non-qualified retirement plans also lack the same federal protection and may be subject to creditors’ claims. Furthermore, a Qualified Domestic Relations Order (QDRO) can legally mandate the division of a 401(k) to a former spouse as part of a divorce settlement, creating an exception to the usual creditor shield.

The Role of the Bankruptcy Trustee

Upon filing a Chapter 7 petition, a bankruptcy trustee is appointed to administer the case. The trustee’s role involves reviewing all of the debtor’s assets, including retirement accounts, to determine which are part of the bankruptcy estate and which are exempt. To perform this assessment, the trustee will request various documents, such as current 401(k) statements, tax returns, and bank statements.

The trustee uses these documents to verify balances, confirm the qualified status of retirement plans, and apply relevant exemptions. Full and accurate disclosure of all financial assets, including retirement accounts, is a mandatory requirement during the bankruptcy process. The trustee’s objective is to identify and liquidate non-exempt assets to distribute proceeds among creditors, while ensuring the debtor retains protected property.