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When your home goes into foreclosure, your lender sells your home and applies the sale proceeds to your past due debt. If your home sells for less than the balance of your loan, your lender may lay claim to your other financial assets. State and federal laws exist that limit the ability of lenders to go after your retirement nest egg.
In some states, including California, most purchased mortgages are non-recourse loans. This means your lender has no recourse if your foreclosed home sells for less than the balance of your loan. However, refinance loans in California and all mortgages in states such as Kentucky are recourse loans. With a recourse loan, your lender can take you to court and obtain a deficiency judgment to settle any residual balance on your home loan. Depending on your state's laws, your lender may have the legal right to garnish your bank accounts and other financial assets.
Under the federal Employee Retirement Income Security Act of 1974, a creditor cannot gain access to your company-sponsored retirement benefits in order to settle a past due debt. Your 401(k), SIMPLE IRA and other types of pension plans are therefore out of your lender's reach. However, ERISA does not protect assets held in self-directed plans such as an Individual Retirement Account. A lender with a deficiency judgment can go after cash you rolled into an IRA from an old 401(k).
While federal laws do not ordinarily protect IRA funds from creditors, your IRA is safe if your financial problems cause you to file bankruptcy. Under the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act, up to $1 million of your IRA funds are out of bounds for your mortgage lender and your other creditors. Your creditors could ask a judge to garnish your accounts for any amount you have in an IRA over and above this threshold.
In addition to variations in state foreclosure laws, different states also have various levels of protection for retirement funds held in IRAs. In California, no dollar threshold exists but your creditors can only go after your IRA if you will have enough cash left in the account to cover your anticipated retirement costs. In Florida, your mortgage lender cannot go after funds held in a Roth IRA; you can be convicted of fraud, however, if you move money to the account simply to hide it from your creditors. Other states such as New Mexico have no laws in place to protect IRA funds from mortgage lenders and other creditors.
- Kentucky Legislative Research Commission: Housing Foreclosures in Kentucky
- State of California Franchise Tax Board: Foreclosures and the next wave
- Wall Street Journal: How to Protect 401(k)s and IRAs From Creditors
- Los Angeles: IRAs Could Be Fair Game in Lawsuits
- New York Times: Protecting Retirement Accounts From Creditors
- Florida Bar Association: Roth IRA Conversions as an Asset Protection Strategy: Does it Always Work?
- United States Department of Labor: Frequently Asked Questions about Pension Plans and ERISA
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