Zuckerberg Bankruptcy Law Office

Whenever a reader of my Indiana bankruptcy blogs poses a question on a subject I think others need to know about, I'll include it in a new blog post.  This time a reader asked whether filing bankruptcy would mean he'd need to stop contributing to 40lk.  In his question, the reader was clear about the fact that retirement plan assets are protected from creditors.  He already knew that the money he and his employer had already put into the plan was safe.  He just wanted to know if the law would allow him to keep having payroll deductions into the 401k, or whether he'd be forced to use that money to pay creditors.

First off, I want to explain that everything I say about 401k also applies to other types of retirement plans, including SEP, SIMPLE, 403b, etc. (see "More About Double Exempt Retirement Plans").  Even IRA assets are protected in bankruptcy.

As you might imagine, most bankruptcy clients don't have very large retirement accounts to begin with,  Worse, people who didn't get legal advice early on often make the mistake of pulling out money from their retirement plans to pay bills, bills that might have been discharged in bankruptcy! The fact is, our government places a great deal of importance on saving for retirement, often to the point of giving retirement savings priority over paying creditors!

The general answer to my blog reader's question, then, is YES.  While a local court might set a maximum on how much a debtor can contribute to 401k or other retirement plan (usually 5% of pay is considered reasonable), contributions are allowed.  BankruptcyForum.com cites an actual case in which a debtor was allowed no only to contribute to his retirement plan, but to keep having payroll deductions made to repay 40lk loans, giving the 401K a place in line ahead of other creditors!

In one of my earlier blogs I described a case in Massachusetts in which the court ruled that the debtor was allowed to "pay herself first" by saving for retirement. Of course, the court might take a look at a debtor's history of making retirement plan contributions in the past, just to be sure the intent was not to use 401k contributions as an excuse not to pay creditors.  Still, case law appears to bear out the government's intent to encourage retirement savings even by debtors who are turning to the courts for protection.