Protecting a 401(k) during bankruptcy proceedings

| Mar 18, 2021 | Bankruptcy |

Bankruptcy means the opportunity for a fresh start for people in North Carolina who feel the pressure of drowning debts. One of the primary concerns people face as they prepare to file for bankruptcy is the uncertainty of what will happen to their remaining assets.

Retirement benefits such as a 401(k) have unique protections but can still feel the impact of bankruptcy under certain circumstances. When people know what to expect they can effectively prepare so they can preserve as much of their retirement savings as possible.

The ERISA Act

The Employee Retirement Income Security Act or ERISA provides a standard level of protection to plan participants in various circumstances including those who file for bankruptcy. According to the U.S. Department of Labor, established in 1974, the ERISA dictates regulations regarding participation standards, fiduciary responsibilities, vesting, and plan features and funding.

The fate of 401(k)

Most employee-sponsored 401(k) plans fall under the protection of the ERISA. According to The Motley Fool, accounts protected by the ERISA remain untouched throughout bankruptcy. Under circumstances where ERISA protections do not apply, people will have a guaranteed $1,362,800 of their 401(k) savings. Officials may draw upon remaining funds to help pay down personal debts as part of a bankruptcy settlement.

Experts recommend that people work with their employer to determine whether or not the ERISA protections apply to their 401(k) plan. This information can help people strategize ways to plan for their future. Following bankruptcy, it may take people some time to re-establish their finances. However, as soon as they are able, people may benefit from starting to contribute to their 401(k) plan again so they can proactively plan for their future.