What Happens to Your 401(k) If You File a Bankruptcy in Arizona?
- If you file for Chapter 13 bankruptcy, you keep all of your property and repay your debts under a debt repayment plan. Therefore, if you file for Chapter 13 bankruptcy, your 401(k) plan will be out of reach of the bankruptcy trustee and your creditors. On the other hand, if you file for Chapter 7 bankruptcy, the bankruptcy trustee may take some of your property and use it to pay your creditors. The bankruptcy trustee can take all property that the state does not designate as being exempt from being used to pay creditors.
- After you file your bankruptcy petition, your property becomes the property of the bankruptcy estate. The Federal Bankruptcy Code defines property of the bankruptcy estate as a debtor's legal or equitable interests in property as of the commencement of the bankruptcy case. The bankruptcy trustee can use property of the bankruptcy estate to pay creditors. To determine what happens to your 401(k) plan after you file for bankruptcy in Arizona, you need to determine whether it is property of the bankruptcy estate.
- The Supreme Court has held that a retirement plan that contains a legally enforceable anti-alienation clause is not property of the bankruptcy estate. An anti-alienation clause provides that benefits provided under the 401(k) plan may not be assigned or alienated. Therefore a retirement plan containing an anti-alienation clause would be out of reach of the bankruptcy trustee and creditors. If your 401(k) plan contains an anti-alienation clause, it will not be subject to distribution if you file for Chapter 7 bankruptcy in Arizona.
- The Employee Retirement Income Security Act (ERISA) protects the money you have placed in a retirement account. ERISA ensures that a worker receives his defined-benefit pension if he has fulfilled the conditions to receive it. This principal was affirmed in the Supreme Court case of Patterson v. Shumate.
