If you can no longer manage credit cards, mortgages, car loans or other debts, you have the option to file for bankruptcy under state and federal laws. You can protect property classified as exempt from seizure by a bankruptcy court trustee, so it is not used to pay your creditors. In Oklahoma, you may protect money you have invested in a 401(k) retirement account or other employer-sponsored retirement account as long as the money remains in the fund.
Exemption for 401(k) Accounts
Under both federal and Oklahoma state laws, 401(k) plans are exempt from bankruptcy proceedings. This means the money you saved in your 401(k) retirement account is protected from seizure by the bankruptcy court and may not be used to pay your debts. The court may not claim these funds or seize any contributions to the plan by your employer. Although part of your paycheck may be subject to garnishment to pay your debts, money you contribute to your 401(k) is exempt from garnishment. But, if you withdraw any funds from the 401(k) account, the distribution amount will not be exempt.
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 requires passing a means test to determine eligibility for anyone filing for Chapter 7 bankruptcy protection. You must calculate annual household income and deduct certain essential expenses. To qualify for Chapter 7, your income must fall below the median income for a family of your size in your state. In Oklahoma, as of 2013, the median income for a family of four was $64,374. If you fail the means test, you may still qualify for a Chapter 13 bankruptcy, in which a court trustee sets up a plan to repay your creditors based on your income and assets. The money saved in a 401(k) does not count for the means test, and you may not classify a 401(k) loan as a debt or expense. But, if you withdraw that money before you file for Chapter 13, it must be listed as an asset.
Discharge of Debts
At the conclusion of a Chapter 7 case, the court discharges all debts that can be legally discharged. This includes credit card debt, installment loans, personal loans and mortgage debt, although you would still be subject to foreclosure on the property. Once the Chapter 7 discharge takes place, you may take a distribution from your 401(k) account, which may be subject to early withdrawal penalties set by the IRS according to your age.
Chapter 13 Repayments
A repayment plan set by a Chapter 13 trustee can last anywhere from three to five years. During this time, you must report any changes in your income or assets. You may count repayment of a loan from a 401(k) account as an expense against your income. If you make any withdrawals from a 401(k) before the Chapter 13 is discharged, however, the court trustee will take that money into consideration and may revise the repayment schedule.
Not all debts can be discharged in bankruptcy, including money you owe for federal and state taxes. The IRS reserves the right to seize any and all assets for payment of back taxes, whether or not you have filed for bankruptcy. This includes funds you've saved in a 401(k) account, which can be levied by an IRS order if you fail to come to a repayment agreement with the agency. The money seized by the IRS is not subject to an early withdrawal penalty, which you may have been required to pay if you first took a distribution and then used the funds to pay the IRS.