Twice in the last two days I have had the same discussion with two prospective clients. Each client owned a house that at the height of the market was worth over two million dollars. In each case, the client had encumbered the house with a loan for about a million dollars a few years back. Each client had suffered significant financial set backs related to the current economic recession. Both clients had been paying mortgage payments close to $10,000.00 per month from their retirement accounts for the past year, and both clients were now at the end of their rope, with their retirement accounts dwindled to a mere pittance.
Monday morning quarter backing on the eve of filing bankruptcy does not bring back a depleted 401K or IRA. But there is a lesson for others in these two cases. Before tapping out your 401K or IRA to continue paying a mortgage on a house that is doomed to end up in foreclosure, know your bankruptcy options.
Nearly all retirement accounts that are governed by the Employee Retirement Income Security Act (ERISA, as it is called), including pensions and 401Ks, are not assets of a bankruptcy estate because they almost all universally contain an anti-alienation clause that protects them from the reach of creditors. Due to recent amendments to Section 522(n) of the Bankruptcy Code, Individual Retirement Accounts (IRAs), and other similar retirement savings vehicles, while assets of the estate, enjoy special protection capped at $1 million.
What does all this mean? It means in most cases, all the money drained from retirement accounts to keep a doomed mortgage out of foreclosure for an extra year, could have survived a bankruptcy. Retirement accounts exist to help you survive in your twilight years. It does you no good to waste these assets to delay an otherwise inevitable foreclosure. If you find yourself in this situation, before draining your 401K or IRA, talk with a bankruptcy lawyer with experience in foreclosure defense about your bankruptcy options and foreclosure defense options.
Steven P. Combs
Smith Greene & Combs