Legal Question in Bankruptcy in Delaware

I currently have funds in my former employers 401K plan. My former employer filed Chapter 7 Bankruptcy in December 2008. They recently filed a request with the IRS to terminate the 401K plan.

I have been told by the company that manages the plan that I cannot roll over the funds I have in my account to another account. They explained that it is due the status of the bankruptcy proceeding. I wanted to know if I have any legal options that would force them (plan management co. or bankruptcy trustee) to release the funds to me?

Asked on 1/06/10, 12:54 am

1 Answer from Attorneys

Robert Wilcox Wilcox Law Firm

When a company (or a person files a bankruptcy case) a "bankruptcy estate" is automatically created that consists of the debtors property and certain property rights. The funds in a 401k are not the company's money, cannot be used to pay general creditors of the company, and are not part of the "bankruptcy estate".

The situation is even clerarer where a third party (other than the debtors) is the 401k Plan administrator. It is simply not the company's money once it goes into the 401k.

The answer they are giving you does not make sense. While there might be temporary confusion about how the 401kPlan is going to be administered, the funds themselves, in the absence of some extraordinary allegation of fraud or the like, should not be tied up in the bankruptcy court.

I practice in both Delaware and Florida and I've never seen a 401k fund be considered part of the company's bankruptcy estate.

The determination of what is "property of the estate" is within the exclusive jurisdcition of the bankruptcy court, but it does not seem like a complicated decision here. I wonder if the new Plan Manager is just being overly conservative.

If you choose to call us, we can check online records in the case to see what's going on.

Obviously there may be more to it than meets the eye, but the systm is set up to keep those funds separate and available to the employees in just this type of situation.

I hope this helps.

Robert Wilcox

(904) 281-0700

Read more
Answered on 1/14/10, 1:46 pm

Related Questions & Answers

More Bankruptcy Law questions and answers in Delaware