Arizona residents may be surprised to learn that a 401(K) is considered a protected asset in a bankruptcy. A protected asset is one that does not become part of the bankruptcy estate and is not considered an asset of the filer. Someone with less credit card debt than the amount of a retirement account can have the debt discharged in a personal bankruptcy and keep the money in the retirement account.
People should be warned that a 401(K) or retirement account is only a protected asset if the money remains in that account. Someone who is filing a bankruptcy will lose this protection on any funds that they withdraw from the 401(K) and move to their personal bank accounts. People are often confused on this issue and may start using the 401(K) account for everyday expenses; this can result in this money being seized and used to repay their debt during bankruptcy proceedings.
Anyone considering filing bankruptcy must understand that only the retirement account is protected. People may have money in nonretirement investment accounts or savings accounts and think that these are protected as they are expecting to use the money for retirement, but they are not. Some critics complain that someone with a large amount of money in a qualified retirement account can still wipe away credit card in a bankruptcy, but this is what the law provides.
A person who has burdensome credit card debt may get relief from filing a personal bankruptcy. People should remember though that the bankruptcy laws are very complex and it is important not to do anything to jeopardize one’s petition. Bankruptcy lawyers are an important resource for anyone going through this process.