The Biggest Reason You Should NEVER Use Your 401(k) to Pay Off Debt by Alix Langone Bankruptcy among older Americans is on the rise, and some of those who ultimately file sacrifice their retirement savings in the process. This is a mistake, experts say, because funds in your 401(k) are protected in bankruptcy by federal law. So even if most of your assets are seized to repay your creditors, your retirement account is considered exempt and can’t be touched.