Some assets are already protected by law, says attorney Fred Reish, a partner in the Los Angeles office of Drinker Biddle & Reath. Some are specific to where you live. Statutes in some states might protect an antique Bible, he says, or a gun.
The most important federally protected assets are qualified retirement plans, such as the 401(k). It's covered by legislation known as the Employee Retirement Income Security Act of 1974, or ERISA. If the funds from a qualified account are rolled over into an individual retirement account, the ERISA protections extend to the rollover.
This protection comes in handy if you run into trouble and have to file bankruptcy. "There was a Supreme Court decision of tremendous importance where it was decided that ERISA protections for retirement outweigh the importance of creditors being paid in bankruptcy," says Reish.
Workers with access to a 401(k) plan should contribute to it, at least to the extent that they receive matching contributions from their employer, says Reish. "If you have a qualified plan covered by ERISA and you have to file for bankruptcy," he says, "the money you have accumulated for retirement is protected by the interplay of two federal laws -- bankruptcy and ERISA. So it's a mistake not to maximize matching contributions to those plans."
Only two creditors can surmount that protection, Armstrong says -- your spouse in a divorce or the U.S. government.