Serious question with no easy answer. As a practicing bankruptcy attorney, I meet with clients all the time who have liquidated a 401(k) to stave off bankruptcy, only to file a few months later. It is probably not wise to liquidate a 401(k) to avoid bankruptcy without first sitting down with a bankruptcy attorney to discuss your individual cirmcumstances. Your 401(k) or pension is your future, do not part with it without giving the matter serious consideration.

If you are considering liquidating your 401(k) to avoid bankruptcy or to hold off your creditors for awhile longer be aware that ERISA qaulified 401(k) and pension plans are not part of the bankruptcy estate. Your creditors cannot take the 401(k) from you and you will not lose the funds in bankruptcy. It is possible to retain your 401(k) and wipe out unsecured debt through the bankruptcy process.

Keep in mind that many consumers who end up filing for bankruptcy do so AFTER having attempted to avoid it using their 401(k). Two important factors to be considered before liquidating a 401(k) to pay down debt are:

1. How much debt do you have? Will the funds from your 401(k) after penalties, satisfy all of your creditors claims or will they only make a small dent?

2. If you’re trying to catch up on mortgage arrearages, will the 401(k) funds cure the problem and solidify it going forward? Or will you be faced with the same situation in a few months sans 401(k)?

The issue becomes whether liquidating a 401(k) is a an effective solution to your debt problems or a make shift dam that is bound to break any day. Consult with an attorney, but know that in most cases a 401(k) is exempt from creditors claims even in bankruptcy. It is possible to keep your 401(k) for your future while still filing for bankruptcy.