Can Bill Collectors Garnish Your 401(k)?

by Craig Berman

When bill collectors go to court and win the right to garnish your wages and levy your bank accounts, they can have a lasting impact on your income stream. They generally can’t, however, access your 401(k) funds. However, not every retirement plan falls into that safety zone, and that doesn’t mean 401(k)s are always safe from judgment.

ERISA Is Your Friend

While state laws regarding creditor powers vary, the federal government offers protection that safeguards retirement plans falling under the Employee Retirement Income Security Act. ERISA covers a specific type of employer-based plan that provides for retirement income for employees who participate. Most 401(k) plans fall into that category. As a result, your 401(k) generally is protected from creditors, even those who have a judgment against them. If you have a single 401(k), however, some states do allow creditors to access the funds.

Protected in Bankruptcy

Your 401(k) is safe, even if you’re forced to declare bankruptcy. As long as the funds remain in the account prior to filing, they’re considered protected assets, and most creditors can’t touch them. Funds in your 401(k) can be taken only under certain circumstances. If you get divorced, for example, your ex may be granted money from the account. The IRS also can seize assets from the plan to settle federal income tax debts or as the result of other crimes and penalties levied by the government.

Watch the Withdrawals

Once the funds leave your 401(k), they’re usually fair game for creditors. That doesn’t tend to affect younger account holders, who discouraged from taking money out before age 59 1/2 anyway to avoid paying a 10 percent penalty. But if you’re thinking of taking a hardship loan to buy your first house or pay qualifying medical or educational expenses, you may find that the proceeds vanish as soon as they hit your account.

Putting on Pressure

Creditors can’t garnish your 401(k), but that doesn’t mean they won’t try to get those funds anyway. If you owe a creditor money and it’s long past due, you might be pressured by debt collectors to siphon money out of your 401(k) to pay that off. Doing so benefits the creditor, which gets money it might otherwise have to write off, but it probably doesn’t help you. Given the penalties that come from taking the money out early, you’re usually better off finding other ways to settle obligations rather than raiding your retirement funds.