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Should you withdraw money from a 401k or file Bankruptcy?

March 12, 2009
Topic: Bankruptcy

Most persons who end up considering bankruptcy have tried to exhaust other sources of income before resorting to bankruptcy. One source of substantial savings is 401k. However, the first misunderstanding that persons considering bankruptcy have is that 401k money can be collected by creditors during a bankruptcy.  Bankruptcy and Florida law allows that retirement accounts are exempt from collection from those who have declared bankruptcy, up to one million dollars.

Moreover, withdrawal of money from a 401k is considered income by the IRS and by the bankruptcy court when considering whether a person is eligible for Chapter 7 bankruptcy. Under the means test, persons are eligible to file Chapter 7 under the income portions of the test if their income is at or below the median income for their state. However, if a person has taken withdrawals from their 401k or other retirement in the last six months then that is income that must be declared and could make a person ineligible for Chapter 7 relief.

Analysis of whether a person qualifies or not under Chapter 7 and the means test is a long and complicated affair, so please give us a call to discuss whether you qualify. In the end, most persons are better off not tapping into their 401k savings to pay unsecured debt that could be discharged through bankruptcy. In essence, it is money wasted that could be better used for your retirement.

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