New bankruptcy legislation could
endanger your retirement savings
23, 2000 -- Your retirement savings could
be diverted to pay off credit-card balances in bankruptcy under
a proposed revision of federal bankruptcy law.
It is even conceivable that an exorbitant doctor's
bill that pushes you into bankruptcy could be paid off with your
401(k) or pension -- against your will.
That's because you may have unknowingly agreed
to these arrangements at a time when you were financially healthy
and blissfully unconcerned by the thought of bankruptcy.
Members of the U.S. House and Senate are working
out differences in bankruptcy bills they each passed this session.
Their goals are to cut what are perceived as abusive bankruptcy
filings and to get more money into the hands of creditors, especially
As mentioned in a previous Bankrate.com
article, the bills mandate means-testing to determine whether
bankruptcy filers will have to partially repay unsecured debts,
and require debtors to attend credit-counseling classes before they
can file for bankruptcy.
Congressional leaders have cooked up a plan
whereby the differences in the House and Senate versions of the
bankruptcy bills will be resolved informally and in secret instead
of in a formal, public conference committee. Then they intend to
tuck the voluminous bankruptcy reform language into another bill,
probably an innocuous one that won't generate much opposition or
the small print and other traps
The Senate version of bankruptcy reform, which that chamber
passed on Feb. 2, contains a section where individuals can sign
away their claims to their own retirement savings before or during
bankruptcy. The White House, a senator, bankruptcy experts and the
retirement-planning industry have registered their opposition.
Normally, creditors can't touch assets of a
401(k) plan, Keogh plan or pension fund in bankruptcy proceedings.
Current law prohibits creditors from raiding retirement plans because
lawmakers intended bankruptcy to give debtors a fresh start, free
from a lifetime of suffering over unpayable debts.
But under the Senate version of bankruptcy reform,
unsecured creditors such as credit-card lenders and utility companies
could tap the assets of your retirement account if you previously
gave them permission to do so.
Why in the world would you give your permission?
By not reading -- or not understanding -- the fine print in the
paperwork you sign.
"I fear that many individuals will sign
away their pensions unknowingly," Sen. James Jeffords, R-Vt.,
said at a congressional hearing in April. "Even for knowledgeable
consumers, the cost of applying for a credit card should not be
one's retirement security."
During the hearing that followed, experts criticized
the proposal as bad policy that could not only permanently impoverish
people who declared bankruptcy following illness, job loss or divorce,
but also deter employers from offering retirement plans at all.
problem of protection
Bruce Markell, a law professor at the University of Nevada-Las
Vegas, told the panel that the proposal doesn't "provide any
procedural protections to ensure that any waiver is voluntary and
intentional." In fact, he added that there is no requirement
that the waiver be written.
The pension-grabbing language might be in the
boilerplate of a credit-card application or in an amendment printed
in small type and stuffed into a monthly bill. In the latter case,
you might signal your acceptance of the new terms just by continuing
to use a credit card.
"It might very well find its way into the
terms of service for those who provide services on unsecured credit
such as doctors and even utility companies," Markell said.
Imagine the uproar the first time a doctor grabs
a patient's pension because the medical insurance capped out and
the patient had to declare bankruptcy.
President Clinton has sent a letter to Congress
saying he was "concerned" that the bill could "eliminate
protections for reasonable retirement pensions that reflect years
of contributions by workers and their employers," but he didn't
threaten a veto. Indeed, he used the stronger word "disturbed"
to describe his reaction to another potential problem in the bill
-- that Congress might not plug a loophole that allows violent or
vandalistic antiabortion demonstrators to declare bankruptcy to
avoid paying damages to abortion clinics.
Sens. Chuck Grassley, R-Iowa, and Jeff Sessions, R-Ala., have
stepped into the retirement fray by proposing what they call a "millionaire's
cap." That term refers not to Mark McGwire's hat but to blanket
protection for all retirement assets up to $1 million.
The cap would be $250,000 for those under age
21 and steadily increase to reach $1 million for those age 65 and
The Grassley-Sessions proposal would seem to
cover individual retirement accounts, whether regular or Roth. Under
current law, IRAs usually, but not always, are protected in bankruptcy,
depending on the wording of the IRA agreement and what state the
debtor lives in.
in the range
Another hot issue in the debate over bankruptcy reform deals with
the "homestead exemption." In five states -- Florida,
Texas, Kansas, Iowa and South Dakota -- a bankrupt debtor can keep
his or her primary residence, no matter how valuable it is. Because
of this, ritzy enclaves like Boca Raton, Fla., are beacons for millionaire
scam artists who abuse the bankruptcy system: an owner of a $3 million
seaside mansion can declare bankruptcy and keep his "house."
The Senate version of bankruptcy reform would
put a national cap of $100,000 on the homestead exemption nationwide.
Under this plan, creditors could force the sale of a bankrupt debtor's
house. The owner could keep the equity up to $100,000 and the creditors
could get the rest.
The House version would establish a $250,000
cap nationwide, but would allow states to set a larger cap after
the federal law goes into effect. This proposal has its critics,
but it probably is more to the liking of the Florida and Texas congressional
delegations, who represent one in eight Americans and wield a lot
of political power.
Texas Gov. George W. Bush, now virtually unopposed
in the Republican presidential nominee race, supports his state's
unlimited homestead exemption.
-- Posted: June 23, 2000