Exempting Retirement Benefits from Bankruptcy in Colorado
| Jurisdiction | Colorado,United States |
| Citation | Vol. 18 No. 1 Pg. 17 |
| Pages | 17 |
| Publication year | 1989 |
1989, January, Pg. 17. Exempting Retirement Benefits From Bankruptcy in Colorado
A bankruptcy client advises counsel that: (1) prior to October 19, 1987, he was a successful stockbroker on 17th Street in Denver; (2) he now lives in a cardboard box under the 15th Street viaduct; (3) he has absolutely no assets with which to meet his sizeable debts; and (4) his only comfort is the $1.2 million nest egg in his corporate pension plan left over from the good old days. He wants to file for bankruptcy, discharge all of his debts, and keep the $1.2 million. What advice should counsel give him?
Under § 522 of the Bankruptcy Code ("Code"), certain types of pension and retirement benefits are exempt from the bankruptcy estate to the extent reasonably necessary for the support of the debtor and the debtor's dependents.(fn1) However, as permitted by the Code, Colorado and many other states have "opted out" of the federal exemptions set forth in Code § 522. These states make available to debtors in bankruptcy the exemptions provided under their own statutes.
The varying state exemption statutes, along with the different bankruptcy courts' efforts to apply them, have resulted in a great deal of confusion. The confusion is made worse by the number of retirement plan options. At a minimum, there are four broad categories of retirement plans: the defined benefit plan, the defined contribution plan, the Keogh plan and the individual retirement account ("IRA"). Within these broad categories are numerous types of specific plans.(fn2) This article analyzes the right of debtors to exempt their retirement benefits from bankruptcy.
Certain kinds of employee retirement benefits have been held to be completely excluded from the bankruptcy estate upon the filing of a petition by the debtor-employee. The basis for the exclusion is Code § 541(c)(2), which provides that a restriction on the transfer of a debtor's beneficial interest in a trust that is enforceable under nonbankruptcy law is enforceable against the trustee in bankruptcy. This provision has been construed by numerous courts to mean that assets held in a spendthrift trust or a retirement benefits plan that qualifies as a spendthrift trust under state law are totally excluded from the bankruptcy estate.(fn3) This rule has been specifically recognized in Colorado in the Matteson(fn4) decision.
In Matteson, the debtor invoked Code § 541(c)(2) in an attempt completely to exclude from his bankruptcy approximately $70,000, representing his vested undistributed interest in a pension plan ("Plan") provided to the debtor by his employer. One of the debtor's creditors challenged the exclusion, contending that the debtor's interest in the Plan was neither excluded nor exempt from the bankruptcy estate.
The Plan in Matteson expressly provided that a participant's interest could not be assigned and was not subject to creditor levy. Withdrawals were only permitted upon the participant's death, retirement, termination or disability, or upon termination of the Plan. The Plan was qualified under the Employee Retirement Income Security Act of 1974 ("ERISA") and provided for mandatory employer contributions with voluntary employee contributions.
The Bankruptcy Court found in favor of the debtor and ruled that the debtor's interest in the Plan did not become part of the bankruptcy estate, because the Plan provided for employees' funds to be held in a trust that qualified as a "spendthrift trust" under Colorado law.(fn5) The basis for this finding was that: (1) the Plan contained restrictions on the ability of the debtor to transfer or mortgage his interest; (2) the Plan contained "spendthrift" provisions preventing creditors from levying on the debtor's funds; (3) the debtor had no present
ability to obtain or control the funds in the Plan; and (4) the debtor was not the settlor of the trust under the Plan. The Court described the Plan as "employer-created and controlled" and emphasized the debtor's inability to exercise dominion and control over his funds held in the Plan.
In so ruling, the Court reconsidered its earlier decision in In Re Pruitt.(fn6) Citing appellate decisions around the country, the Court ruled that, contrary to its earlier decision in Pruitt, Code § 541(c)(2) did not permit a debtor to exclude all retirement funds...
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