When a debtor claims they do cannot pay you what they owe, it is crucial you search far and wide. People who say they do not have money might not have a full bank account, but they may have funds in places they think you cannot touch.
One place people believe their money is secure from creditors is a retirement plan. Yet, not all retirement plans are as safe from creditors as people think.
ERISA can make assets hard for creditors to touch
The 1974 Employment Retirement Security Act (ERISA) provides significant protection to those with accounts created under it. As a creditor, you cannot access money held in most employer-created 401(k) plans because the money does not belong to the individual. Instead, it belongs to the employer. Until that is, the individual withdraws the money, at which point it belongs to them, and you can seek payment from it.
If, however, a debtor has money in an IRA or an independent 401(k), you may be able to collect directly from it because ERISA does not protect these accounts. If so, the debtor is required to jump over some serious hurdles. The debtor must prove the retirement account was created solely for retirement purposes. The judge will look to see why the debtor created the account — was it to provide for their retirement, or was it to try and protect money from creditors?
But even more difficult, the debtor needs to disclose all of their finances – income and expenses and all assets – and prove they need the retirement monies to support the debtor when the debtor actually retires. That means the debtor must prove to the court when the debtor plans to retire, the debtor’s life expectancy, and any special needs the debtor may have in retirement. This requires an in-depth financial expertise few debtors possess.
Oh, and by the way, the debtor has less than three weeks to provide this information to the court!
So, the first step in working out whether you can recover money someone owes you from a retirement plan is to understand the type of plan and which, if any, federal or state laws protect it.
If the law does not let you touch the money in a retirement plan, there are still ways to collect. Once people age, they may realize they cannot take money to their grave. If you can restrict their access to other funds, they may decide that paying what they owe is preferable to eking out their days in poverty with funds they cannot touch sitting in a retirement plan.