Here's What Happens to Your 401(k) When Your Company Goes Bankrupt

Bankruptcy is something both individuals and companies can file for to gain certain protections as they sort out their financial affairs. In many cases (though not all), when a company files for bankruptcy, it shutters operations completely, and its assets are liquidated to try to pay creditors what they're owed to the greatest extent possible.

It's usually the case that if your company goes bankrupt, you'll be out of a job at some point. That may not happen the moment your company files for bankruptcy, as it might take months for your employer's bankruptcy proceedings to be finalized. If you're an essential employee, you may be asked to stay on board until operations truly wind down.

Now you may be worried that your company's bankruptcy filing will impact the money you have in your 401(k) plan. But rest assured that your money is nice and protected.

Creditors can't come for your 401(k)

As part of the bankruptcy process, it's common for companies to release a schedule of liabilities that list their various outstanding debts. It's also common for creditors to file claims against bankrupt companies for the money they think they're owed.

As part of the bankruptcy process, outstanding debts are settled via a legal proceeding in the hopes of making things as equitable as possible for creditors. There's also a hierarchy that's followed to determine which creditors get paid before others. But either way, if you have your retirement savings in a 401(k) plan, your company's bankruptcy filing will not put your money at risk.

The Employee Retirement Income Security Act (ERISA) ensures that employee contributions to 401(k) plans are not commingled with employer assets. This means that in the event of a bankruptcy, creditors cannot go after employee 401(k) funds.

You'll need to find a new home for your money

While you don't have to worry about a creditor coming after your 401(k) if the company sponsoring that plan has gone bankrupt, you will need to find a new home for your retirement savings. When companies shutter, whether as part of a bankruptcy proceeding or not, it's common for their retirement plans to be terminated in short order. So once that happens, you'll need to move your money -- and you may want to move your funds before your employer's 401(k) is terminated.

Now if you're able to line up a new job that offers a 401(k), you could always roll your old 401(k) into that new workplace plan. Otherwise, you can roll your 401(k) into an IRA you open and manage yourself.

It can be unsettling when the company you work for files for bankruptcy -- especially if that bankruptcy is of the liquidation variety, which means your company is closing down and you'll probably be out of work at some point. But while you may have to deal with the stress of finding a new job, you can at least take comfort in the fact that no one will get their hands on your 401(k).