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What happens to your 401(k) during bankruptcy?

Whenever someone files for bankruptcy, they will inevitably have questions about the process. Even if they have been through it before, bankruptcy is far from the simplest of processes; so they will want as much advice and help as possible to get through their Chapter 7 or Chapter 13 filing.

One of the major questions on a bankrupt individual's mind is "how much am I going to lose through bankruptcy?" This question has many answers. You could lose pieces of property; you could lose some money; and you will also lose some or all of your debt through the process of discharging. 

Remember though that some of your assets are considered "protected" during the bankruptcy process. An example of such an asset is your 401(k) retirement account. There can be exceptions but, for most people, their 401(k) will not be touched if they file for bankruptcy.

There is a catch though. The money in your 401(k) is protected only because it is in the account. Removing it from the account and placing it in another bank account strips it of its protected status. The money then becomes an unprotected asset and, depending on where you are in the bankruptcy process, it could be partially or totally lost. 

The lesson is this: leave your 401(k) money in that retirement account until the bankruptcy is complete. Obviously, certain unique situations call for a deviation from this plan, so discuss things with your lawyer as you go through bankruptcy. But, in general, it is wise to leave your 401(k) money right where it belongs.

Source: FOX Business, "Will my 401(k) be Safe if I File for Bankruptcy?," Justin Harelik, June 19, 2013

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