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Timing of events crucial to protect 401(k) in bankruptcy

One of the significant advantages available to a person filing for personal bankruptcy in Texas, regardless of the form taken, is the protection that it can afford. With the filing of a petition for Chapter 7 or Chapter 13 bankruptcy, an automatic stay goes into effect. This is an injunction that blocks creditors from pursuing collection efforts.

Not only does the filing provide time for the person facing debt difficulties to gain a measure of power when things can feel like they're spinning out of control, but filing for bankruptcy also can put a shield around assets. This is particularly important to remember in the context of Chapter 7, also known as a liquidation action. 

Just because you may be entering a period of liquidation of assets to pay off creditors, it doesn't mean you have to give up all you have. A home, a car, furniture, clothes and personal effects may be exempted.

Even your 401(k) retirement funds, if you have them, may be secure from any action if they are handled properly. The key is that the money has to stay in the account until after the bankruptcy filing has been made. If the funds are converted to cash before a filing is secured, the presumption is that the money is available for daily expenses and then it becomes an unprotected asset.

If you are a Texas resident in circumstances that have you considering personal bankruptcy, be sure to contact an experienced attorney before taking any action. By working with an attorney you can explore the different options and assess the situation calmly and rationally. You can then have confidence that your rights are protected and that you'll get the outcome you seek. 

Source:, "Will my 401(k) be Safe if I File for Bankruptcy?," Justin Harelik, June 19, 2013

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