Can I Keep My 401K If I File Bankruptcy in Georgia?

You can absolutely keep your 401k if you file bankruptcy in Atlanta, Georgia.  This is one of the most common questions I receive when clients schedule an appointment with me. Many people thing that the bankruptcy court (or more appropriately, the trustee assigned to your case) will liquidate all your assets under a Chapter 7 bankruptcy.  This is simply not the case.  Georgia has specific laws that protect certain assets of the debtor from being taken by the Chapter 7 trustee or creditors.
For instance, under Georgia bankruptcy law (specifically, the Georgia law specific to exempt property in bankruptcy), the Debtor may shield from creditors up to $23,500 of equity in his or her personal residence, $3,500 in a car, and $5,000 in household goods, among other things.
When it comes to 401k retirement plans, you may exempt the entire amount of the holdings in your 401k.  This is one of the most debtor friendly laws in the state of Georgia.  It just makes sense. How can you expect someone to get back on their feet if their retirement is up for grabs by creditors?
Section 44-13-100 of the Georgia Code states,
“Exemptions for purposes of bankruptcy and intestate insolvent estates
(a) In lieu of the exemption provided in Code Section 44-13-1, any debtor who is a natural person may exempt, pursuant to this article, for purposes of bankruptcy, the following property: ”
(2.1) The debtor’s aggregate interest in any funds or property held on behalf of the debtor, and not yet distributed to the debtor, under any retirement or pension plan or system:
(A) Which is: (i) maintained for public officers or employees or both by the State of Georgia or a political subdivision of the State of Georgia or both; and (ii) financially supported in whole or in part by public funds of the State of Georgia or a political subdivision of the State of Georgia or both;
(B) Which is: (i) maintained by a nonprofit corporation which is qualified as an exempt organization under Code Section 48-7-25 for its officers or employees or both; and (ii) financially supported in whole or in part by funds of the nonprofit corporation;
(C) To the extent permitted by the bankruptcy laws of the United States similar benefits from the private sector of such debtor shall be entitled to the same treatment as those specified in subparagraphs (A) and (B) of this paragraph,
provided that the exempt or nonexempt status of periodic payments from such a retirement or pension plan or system shall be as provided under subparagraph (E) of paragraph (2) of this subsection; or
(D) An individual retirement account within the meaning of Title 26 U.S.C. Section 408.
The above statute appears confusing, but it stand for the proposition that all undistributed funds held in a 401k retirement plan are exempt from creditor collection action.
But here’s another wrinkle that bodes well for debtors.  Your 401k funds may not even be property of the bankruptcy estate. To explain, when you file bankruptcy, all your property becomes property of the newly created bankruptcy estate to be administered and liquidated by the Chapter 7 trustee appointed to your case.  However, the Supreme Court has held that retirement plans with an enforceable anti-alienation clause, which is a provision that prevents creditors from garnishing retirement funds of the debtor, are not property of the estate.  This means that the trustee has no power over those funds.  Virtually all 401k savings plans that are qualified under ERISA (Employee Retirement Income Security Act) have an anti-alienation clause.