401k Vulnerable?

[sleepyjohn]

hi

I have a friend undergoing severe anxiety and depression brought on by a couple of poor decisions made much worse by the world economy.

He is incapable of thinking clearly for himself right now and I am trying my best to understand his affairs.

He has a small business of 20 years in the US employing eight people I think. He manages to live in Thailand about half the time. In the recession he says it is suffering badly and he is very concerned it will go under. From there he is fearful that his property payments will get behind resulting in foreclosure.

Here is the bit I am interested to learn about:

He is worried that his 401K is vulnerable as a source of prospective debt repayment to debtors.

I asked him what sort of company it was, whether it had limited liabilities, but he seemed to think he was vulnerable.

So....can a 401K be sequestered by a court to repay debts?

thanks on his behalf

John

Edited June 8, 2009 by sleepyjohn

[Carmine6]

Normally 401Ks are protected. But if it's just him in the 401k, it could be up for grabs. Need to talk to a lawyer about that.

[sleepyjohn]

Normally 401Ks are protected. But if it's just him in the 401k, it could be up for grabs. Need to talk to a lawyer about that.

Thanks but I hope to get some advice from the forum here which I have sometimes found amazingly informative.

Edited June 9, 2009 by sleepyjohn

[ballbreaker]

Normally 401Ks are protected. But if it's just him in the 401k, it could be up for grabs. Need to talk to a lawyer about that.

Thanks but I hope to get some advice from the forum here which I have sometimes found amazingly informative.

"So....can a 401K be sequestered by a court to repay debts?"

This was your question and Carmine6 provided accurate info. Usually a 401k set up for all employees will be protected but owner only plans can be used to pay debt. The deciding factors will be how company was formed (corp, s corp or some other manner) and type of 401k that was created.

All the answers will be found in the paperwork that formed the company and 401k plan.

Edited June 9, 2009 by ballbreaker

[Carmine6]

Update. This post got me thinking about protecting my own self employed 401k, and what I said about a 1 person 401k used to be true . The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 seems to have added protection for solo 401Ks and also IRAs. Regular 401k's are protected under ERISA. It's a new law so weird circumstances could still cause problems.

http://newjerseybankruptcycenter.com/wordp...and-bankruptcy/

http://www.entrepreneur.com/money/personal...ticle79452.html

The new bankruptcy code has significantly expanded bankruptcy protection for many debtor’s retirement plans. Because of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), many debtors who are facing bankruptcy can now shield their IRA assets from creditors. While retirement plans that satisfy the requirements of the Employee Retirement Income Security Act of 1974 (ERISA) — such as employer-sponsored plans like 401(k)s and 403(b )s — have long been excluded from an individual’s bankruptcy estate, BAPCPA has extended these bankruptcy protections to IRA’s and to certain other retirement type accounts.

BAPCPA also covers SEP and SIMPLE IRA’s. Assets within Simplified Employee Plan (SEP) and Savings Incentive Match Plan for Employees (SIMPLE) IRA’s are excluded from bankruptcy proceedings — and they’re shielded for unlimited amounts. Additionally, BAPCPA provides bankruptcy protection for Keogh plans and independent (or “solo”) 401(k) plans, which are typically set up by someone operating a sole proprietorship. Because ERISA protections do not extend to either Keogh or independent 401(k) plans, the bankruptcy protections offered by BAPCPA provide safeguards for debtors that didn’t exist previously.

The new law also reinforces the unlimited protection that currently exists for 401(k) plans, 457 plans, 403( plans, governmental plans and tax-exempt organization retirement plans, and adds to the list of exemptions from the bankruptcy estate plans for the small business and/or self-employed person, including SEP-IRAs, SIMPLE IRAs, Keogh plans and solo 401(k) plans. (Given unlimited bankruptcy creditor protection, such retirement accounts are likely to become even more attractive retirement-savings vehicles in years to come.)

[sleepyjohn]

Ah now this is turning into a really useful thread already, thankyou Carmine et al.

I shall try to ask the more exact details from my friend tonight (not easy in his condition) but I remember him saying he sort of was in charge of investing the "retirement fund" for his employees and was feeling rather over-responsible doing that. (I advised he therefore start to withdraw from this). That suggests it's a typical small business where he has started things up for all of them, and so far I'm thinking he's not the sole 401'er but all of them are.

Do keep it coming and I'll advise more detail ASAP.

He is a nice person who regularly helps others, and now needs help from us.

cheers...

[sleepyjohn]

I have since enquired and my assumptions in the last post were accurate. He does indeed have a 401K and so do his employees.