Arizona

Tax Debt and Bankruptcy Blog

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By Michael S. Anderson of Anderson Tax Law logo for Arizona tax attorney Michael S. Anderson P.C.
  • 401k Should Be Safe In Bankruptcy

    401k and Bankruptcy

    Bankruptcy is still considered by most people to be a last resort, and I don’t necessarily disagree, but thinking that way can result in a big mistake.

    In an effort to avoid bankruptcy, the honest, hardworking, debtor sees his or her 401k as a way to stay afloat in the hope that things will turn around.  Funds are borrowed from the account initially and then it is often just cashed out.  Penalties and tax are withheld and the remainder goes to living expenses and debt payments.

    The problem becomes apparent when things haven’t turned around and the 401k money is gone.  The debt still exists, a lawsuit or two is filed and thoughts of bankruptcy loom large.

    When the Debtor visits with the Bankruptcy Attorney, he learns, often for the first time, that the funds in the 401k account were safe from creditors the entire time and would have been safe from the Bankruptcy Trustee had the filing been done with the 401k still intact.

    In fact, funds in a 401k are not even property of the Bankruptcy Estate.  The Supreme Court has held that most retirement plans that contain enforceable “anti-alienation” clauses, aren’t property of the bankruptcy estate and aren’t subject to the jurisdiction of the Bankruptcy Court.

    In 2005, this protection was extended to include a very large portion of Individual Retirement Accounts (IRA) as a result of the  Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 or BAPCPA.

    Michael Anderson, Tax Lawyer In ArizonaWritten By:

    Anderson Tax Law
    2158 N. Gilbert Rd. Ste 101
    Mesa, Arizona 85203

    Phone: (480) 507-5985
    Fax: (480) 507-5988
    Email: [email protected]
    Website: http://taxlawyeraz.com