Today, automakers got the life line from the government. It might save them and their employees. Other companies that went bankrupt recently were not lucky. Hundreds of thousands of workers lost the jobs because the companies entered bankruptcy. What will happen to the pension, 401k and health benefits of the employees if their companies are bankrupt?

Pension plans of bankrupted companies can’t be touched by creditors by federal law. Pension Benefit Guaranty Corporation insures the pension plans.

401k plans are also shielded from creditors by federal law. However, there is no insurance for 401k plans. If you made some poor choices in your 401k plan of if you have invested heavily in your (bankrupted) company’s stock, your 401k will suffer.

If the company files for Chapter 7 bankruptcy, your health benefits will be gone immediately. You will have no health insurance coverage at that point. However, if a company files for Chapter 11 bankruptcy, the health benefits will still continue for the employees. If health benefits are taken away from the employee, he/she should still be eligible for COBRA although the premium will be lot more expensive. If your spouse is working, it’s better to add yourself to your spouse’s health plan rather than opting for COBRA.

According to the survey by Bank of  America,  18% of Americans said they have withdrawn retirement assets prematurely because of the recent economic turmoil. Many raided those accounts to pay for near-term financial obligations, including credit card debt and mortgage payments. But more than one in five, or 22%, withdrew money early from their retirement because of a recent job loss.

Treating your 401k account as an ATM is not a good idea irrespective of your financial situation, unless you are bankrupt or face real hardship. If you desperately need the money, the better option is to take the loan from your 401k or IRA. Marketwatch folks wrote a detailed article that gives information about various options to handle your individual situation.