Setting money aside in a 401(k) helps you plan ahead for your retirement years but the possibility of losing that money along the way can be intimidating. If you rack up a large amount of debt, you may be concerned about having a lien placed on your accounts. When dealing with a 401(k), your money is usually not risk.
When you owe money, the creditor could file a lawsuit against you and get a judgment, which can be used to file a lien on your property. A lien is a legal claim on property that prevents the owner from selling a property without paying the creditor. Liens can be placed on items such as a house or a car. Liens cannot be placed on bank or retirement accounts.
Once money is in a 401(k), it cannot be touched by creditors in any way. The money in the account is not subject to judgments or claims of any kind by normal creditors. This is even true when you file for bankruptcy. Once you file for bankruptcy, the court will not use the assets in your 401(k), as they are exempt.
A possible exception to this is tax debt. The Internal Revenue Service can take money out of your 401(k), although will go after other assets first in most cases. In this scenario, the IRS can attach a lien to a 401(k) or to another type of retirement account that you may have.
If you have a significant amount of debt, it may be to your advantage to file for bankruptcy instead of accessing your 401(k). By filing for Chapter 7 bankruptcy, you keep the money in your retirement account and get rid of your debts. The downside to this is that it damages your credit score.
- Moran Law: Tax Liens and Retirement Plans
- 401k.org: Your 401(k) is Protected
- Bankrate.com; Cash out 401(k) or File Bankruptcy?; Justin Harelik; November 9, 2010
- Internal Revenue Service. "Understanding a Federal Tax Lien." Accessed Sep. 18, 2020.
- Experian. "Tax Liens Are No Longer a Part of Credit Reports." Accessed Sept. 18, 2020.
- Experian. "What Affects Your Credit Scores?" Accessed Sep. 18, 2020.
- Federal Trade Commission. "Fair Credit Reporting Act 15 U.S.C § 1681," Page 22. Accessed Sep. 18, 2020.
Luke Arthur has been writing professionally since 2004 on a number of different subjects. In addition to writing informative articles, he published a book, "Modern Day Parables," in 2008. Arthur holds a Bachelor of Science in business from Missouri State University.