Creditors who are looking to collect on consumer debt may find themselves facing unscrupulous efforts to avoid repayment. In these situations, the creditor may need to consider various ways to get the money. One example is to consider the consumer’s retirement assets.
Creditors who are looking to collect payment through retirement assets must navigate both federal and state laws to reach these assets.
How can a creditor reach retirement assets for payment?
The ability of a creditor to go after retirement assets often varies based on multiple factors, including the type of retirement account and the state. The later will be discussed more below. As for the former, let’s look at two popular types of retirement accounts: IRAs and 401(k)s. Although both have some level of protection, the extent available depends on the type of account.
Federal law generally has extensive protections for assets held within 401(k) plans while an IRA generally has less protection. In some cases, the full force of the 401(k)s protections against creditors reaching these assets can extend to IRA if the IRA is the result of the debtor rolling a 401(k) into the IRA. However, a creditor may be able to defeat these protections if the debtor co-mingled these assets with a self-funded IRA.
When it comes to state laws, the answer will vary depending on the location. California is one of 33 states that has rules that may impact a creditor’s ability to reach assets in retirement accounts. One example is when the debtor has moved assets from a 401(k) into an IRA. In California, it is possible to go after assets within an IRA that are not necessary for living expenses. The creditor can also go after distributions.