Supreme Court Protects Pensions from Bankruptcy

Article excerpt

At a time when personal bankruptcies are at historically high levels, the U.S. Supreme Court has delivered a victory to debtrapped consumers with assets in qualified pension plans. Your pension is safe, the Supreme Court said in a recent ruling.

The decision in a case called Patterson vs. Shumate was significant because it irons out apparent conflicts in pension and bankruptcy laws by putting the interest of retirees over the interests of creditors, said Fred Reish, managing partner at the Los Angeles law firm of Reish Luftman.

It also greatly expands the consumer protections under the Employee Retirement Income Security Act of 1974 (ERISA) by extending safeguards to all participants in ERISA-qualified pension plans, regardless of their title, Reish notes.

That's pivotal to owners of small businesses as well as to partners in law and accounting firms, who could find their personal assets at risk if their companies file for bankruptcy protection. In the past, courts often gave retirement funds of top executives less protection than they'd give to the assets of lowervel employees, pension experts said.

"We want people to be able to retire with dignity in this country, and it is clear you can't do that on Social Security alone," Reish said. "When ERISA was passed in 1974 it was intended to give extraordinary protection to pension and retirement money because there was a recognition that once someone retires they are not in a position to rern that money."

But until this case was decided, no one seemed to know exactly what to do when ERISA bumped up against the bankruptcy code. ERISA, the federal pension law, is supposed to protect retirement funds. Federal bankruptcy laws are supposed to help protect creditors by giving them most of the debtor's assets when they file to discharge their debts through bankruptcy.

The question was: When the pension is the debtor's biggest asset, who gets it _ the debtor or the people he owes?

Over the years, different courts had come up with different decisions even when faced with the same facts. Often whether your retirement money was protected depended on who you were as well as where you lived, Reish said.

"Bankruptcy courts were coming up with all kinds of decisions, and federal appeals courts were pretty much split down the middle," Reish said. …

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