ERISA Defined
ERISA is an acronym for Employee Retirement Income Security Act which is a 1974 law that requires that private employers provide information to you about the features of the retirement account, how it is funded, the fiduciary responsibilities for management of the plan along with other data. Any retirement account governed by ERISA is protected from creditors in bankruptcy.
Dollar Limits
There is a very high limit on ERISA retirement accounts protected in bankruptcy—well over a million dollars. You could have a ton of money in your retirement account and it would still be exempt and protected from creditors in bankruptcy. However, while the money sitting in your retirement account is exempt from creditor seizure, any disbursements you receive personally from that account is not. This means that if you file bankruptcy while receiving distributions from your ERISA retirement account, that money will be considered income in bankruptcy. That said, if you’re a debtor who qualifies for Chapter 7 bankruptcy, the trustee cannot take your retirement income to repay debts if you need that income to pay for your basics such as rent, food, and utilities.
Bankruptcy Fraud
If you transfer large amounts of cash into your retirement account right before filing bankruptcy those funds won’t be protected from creditors. Transferring large amounts of cash into your retirement account right before filing bankruptcy will be considered an illegal transfer or even an attempt to defraud the bankruptcy court. And once your actions are found to be fraudulent or illegal, your retirement funds can be seized and used to repay creditors. For example, if you’ve never contributed to your retirement fund and then suddenly invest $20,000 into a 401(k) sixty days before filing bankruptcy, your actions would come under scrutiny.
Retirement Contributions
If you file Chapter 13 bankruptcy, all of your disposable income will go to repay creditors over the course of three to five years. Your retirement account won’t be touched as long as it falls under ERISA and you haven’t made fraudulent transfers. However, you won’t be allowed to continue making retirement contributions while creditors go unpaid. The good news is that you will have more income at the close of your bankruptcy case to contribute to your retirement savings.
If you want to learn more about bankruptcy, contact us today.