Many people are hesitant to file for bankruptcy because they think they will lose all of their savings. The idea of losing control of your money and being forced to pay creditors is scary for virtually anyone.
For those who have started saving for retirement either on their own or through work, the concept of having to liquidate that savings to pay creditors in bankruptcy is almost unbearable. Thankfully, you will be able to keep most, if not all, of your retirement savings, even if you file for bankruptcy in New Jersey.
ERISA and Retirement Accounts
You have worked hard to develop your retirement account, and the government often does not want to take that savings away from you. The federal government’s concern with allowing creditors to take your pension income is that you would end up having to live off the state or Social Security program in retirement if you are not saving for retirement on your own. As a result, most employer-sponsored retirement plans, including 401(k)s are covered by ERISA, the Employee Retirement Income Security Act.
ERISA protects certain retirement accounts from creditors both in and out of bankruptcy. However, ERISA does not provide protection for individual retirement accounts that are not sponsored by an employer. Nonetheless, New Jersey law provides extra protection in bankruptcy for retirement accounts that may not qualify for ERISA protection.
What ERISA Does NOT Cover
If the account is one of those covered by ERISA, it is completely exempt from creditors, with just two exceptions—domestic support obligations (child support or alimony) and tax debts owed to the IRS. ERISA also does not cover the following types of accounts:
- Plans established or maintained by governmental entities
- Plans developed by churches for their employees
- Plans that are maintained for the sole purpose of complying with unemployment, disability, or workers’ compensation laws
- Plans that are maintained outside the U.S. for the benefit of nonresident aliens
- Unfunded excess benefit plans
Qualified ERISA Plans
To be a qualified ERISA plan, the retirement account must meet very specific requirements. Specifically, the plan must be established by your employer or set by a separate employee organization. It must:
- Provide regular and automatic information to you about the plan, including what the plan does and how the program is funded
- Require employers to provide some funding to the program, either directly or indirectly
- Permit employees to be eligible for the plan after being employed for a specified time
- Allow for accumulation of benefits by each participating employee
- Guaranty benefit payments to employees when they retire, when they terminate the plan or employment, or some other event specified in the plan
Anyone who manages the plan and its assets is held accountable to the employees for mismanagement. In particular, employees have the right to sue the plan itself or the program managers if mismanagement occurs.
ERISA-protected plans most often include:
- Roth IRAs
- SIMPLE IRAs
- SEP IRAs
- Keogh plans
- Profit-sharing plans
- Money purchase plans
- Defined-benefit plans
Some employee welfare benefit plans are also covered by ERISA as well, including things like dental and vision plans, group health and life insurance plans, and Health Savings Accounts.
ERISA and Anti-Alienation Clauses
Each plan must also have an “anti-alienation” clause, which prohibits you from giving your rights to benefits to someone else. It also ensures that your right to benefits cannot be taken away. This provision is particularly important in the debt collection context because it prevents judgment creditors from having access to your plan and your employer is not permitted to release benefits to creditors as well.
Again, this benefit applies both in and outside of bankruptcy. Nonetheless, the benefit may even be extended in a New Jersey Bankruptcy Proceeding.
Bankruptcy in New Jersey and Retirement Accounts
ERISA does not cover individual retirement accounts (IRAs) that are not provided by an employer. That means that if you have a retirement account that you have set up on your own, it likely does not receive ERISA protection. Thankfully, New Jersey is one of several states that provides extra protection to its citizens for their retirement accounts if they file for bankruptcy.
In New Jersey, you have the option of choosing either the federal exemptions or the state-specific exemptions of New Jersey. Both options have their own benefits and drawbacks, so it is important to speak with a bankruptcy attorney before you make your choice. The type of assets that you own and how much equity you have in those assets will dictate which set of exemptions will be most beneficial for you.
Even if the account is not one of the ERISA-qualified plans, the federal exemption will still permit you to keep (or “exempt”) up to $1,283,025 per person for either an IRA or a Roth IRA. This limitation is per person, not per account. The limitation is adjusted for inflation and cost of living every three years. The last adjustment was in April 2016.
New Jersey allows the full amount of your retirement plan to be exempt if you file for bankruptcy. As a result, if you have more than the limitation in your retirement account, it may be a good idea to go with the New Jersey-specific exemptions. Be careful though—there are several other exemption differences, and you do not want to make a decision about which set of exemptions to use on this one exemption alone. Scura Law can help you analyze your potential exemptions and your current assets to determine which set of exemptions will be the most helpful for your situation.
Helpful Tips and Information
Many people make the mistake of tapping into their retirement account to pay creditors. It is tempting to take out money now to stop collection efforts when you are at your wits’ end. But, you shouldn’t do this! By taking money out of your retirement account, you are not only depleting your retirement account, but you are also giving creditors money that they would not otherwise be entitled to receive. Do not liquidate your retirement account to pay creditors!
You should also keep in mind that while money in the account itself is likely exempt, benefits that are currently being paid to you may not be exempt. While there are limitations on how much the trustee can take, excess amounts may need to go to creditors while you are going through bankruptcy. This is particularly true in Chapter 13 cases.
Bankruptcy is an incredible federal benefit that allows you to shake off creditors and get back on your feet in many situations. However, to take full advantage of the program, it will help to have a team backing you up that knows the ins and outs of the system. Call Scura Wigfield, Heyer, Stevens & Cammarota, LLP today to set up an appointment.
Whether you need to completely eliminate your debt through Chapter 7 bankruptcy, or need to reorganize your credit payments through Chapter 13 or Chapter 11, we are well qualified as a full-service bankruptcy law firm for people in these and other New Jersey counties: Passaic County, Hudson County, Essex County, Bergen County, Morris County, and Sussex County. Call us today at 973-870-0434 or toll free 888-412-5091.