Are 403(b)s Exempt from Bankruptcy?

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If you are facing financial trouble you may wonder, are 403(b)s exempt from bankruptcy. 403b Savings accounts are similar to 401k accounts in that both are intended to allow you to save money and earn interest over time in order to help you when you retire.  Unlike a 401k, 403b plans are retirement savings plans specifically for employees of educational facilities and certain non-profit organizations. 

Are 403(b)s Exempt from Bankruptcy?

You may have amassed a great deal of funds in your 403b over the course of your life, but at some point if your finances hit hard times, you may be faced with the difficult decision to declare bankruptcy to help out with other unforeseen bills or expenses. In such cases, you may wonder if your 403b is going to be listed as an asset and sold off or divided up to pay off your creditors.

The good news is that a 403b account is exempt from bankruptcy, just as a 401k account typically is.  In many cases, you will not even be asked about your 403b account by the trustee in charge of your bankruptcy.  This will help you out because you will still have those assets to draw from as you reach retirement age, and you may be able to cash them out (with a tax penalty, of course) once your bankruptcy proceedings have finished in order to provide some seed money to start over or help with bills which were not exempted from the bankruptcy proceedings.

Although your 403b is exempt, it is still an asset and must be declared to the bankruptcy court or bankruptcy trustee at the time when you list your other assets in the beginning of the bankruptcy process.  Failure to declare the existence and current balance of the 403b account may subject you to criminal penalties, or may even lead to your bankruptcy proceedings being dismissed, and to the loss of your federal bankruptcy protection.  Be honest and upfront when asked if you have a 403b account.

What if the 403(b) Administrator Declares Bankruptcy?

It is also important to note that government 403b funds are required by the IRS to be funded, and are typically exempt from corporate bankruptcy.  So, if the school district or non-profit that you work for has experienced financial difficulties or gone under, the funds should still be there.  The IRS mandates that your funds were required to be deposited in a separate custodial account overseen by a trustee, and were not legally allowed to be used for any other purpose besides funding retirement payments to employees who contributed to the plan.  So even if your employer goes bankrupt, you will not lose your money.

Getting Help

If you are declaring bankruptcy and have questions about exempt and non-exempt assets, a bankruptcy attorney can answer specific questions about are 403(b)s exempt from bankruptcy, as well as any other questions you may have as you move through your bankruptcy proceedings.