Pensions, New Jobs, and Landlords in Bankruptcy Cases
Questions that often are asked as clients consider filling for bankruptcy are whether they will be able to keep their pension benefits and whether they will have trouble getting new jobs after filing . The answers are generally positive in these areas for people who do decide to file.
Pensions and other retirement benefits are usually protected in bankruptcy cases, which means that if you file for bankruptcy, you will keep these benefits. When you file for bankruptcy, there are certain types of property that you are allowed to keep. These types of property are kept through what are called exemptions. There is always a list of exemptions for each case, and the particular list you can use is determined by where you live. Every state has its own list of exemptions that apply in bankruptcy and can require its residents to use only that list. This used to be the practice in New York, where I practice, until a few years ago, when debtors in our state were allowed to choose between the New York list and the federal list.
The federal list of exemptions allows debtors to keep their pension benefits. This includes what are called defined benefit plans, which provide a payment on retirement based on years of service and level of compensation. Also included are the familiar defined contribution plans, where the value is based on what the debtor and their employer contribute to the plans. These are usually known by the section of the Internal Revenue Code that creates them: 401(k) plans, 453 plans, 403(b) plans, and so on. In fact, the federal list states that any plan which is exempt from taxation under the Internal Revenue Code is exempt in bankruptcy. This would also include IRA accounts.
New York and most other states also exempt all of these types of pension and retirement benefits.
Worried About Getting a Job After Filing for Bankruptcy?
For those who are worried about a job after filing for bankruptcy, there is a provision barring the government and private employers from discriminating against debtors in employment. The law is clear that an employer, governmental or private, cannot fire you for filing, but it is not clear if a private employer can refuse to hire you based on the bankruptcy filing. One section of the law makes it clear that governmental units cannot deny employment based on bankruptcy, but the section on private employers does not have language specifically prohibiting the denial of employment, and some courts have interpreted this to mean that private employers may refuse to hire because of bankruptcy, while others have held the opposite.
Proving that an employment decision is based on the bankruptcy may be hard as employers can claim that there were other factors in any employment decision. Although employers who get credit reports on prospective hires will see the filing of a bankruptcy, it seems that in actual practice few people have trouble finding jobs after bankruptcy. In fact, I know of one employer who wants prospective hires to file for bankruptcy where they have severe debt loads so that their financial worries will not interfere with their job.
The decision to file for bankruptcy always has to be weighed against what will happen if one does not file. While a debtor always is able to keep retirement benefits even though a petition in bankruptcy is filed, the possibilities relating to employment need to be considered. As with many things, a balancing has to be done. If the debts are so overwhelming that they will never be paid, a bankruptcy may be the answer even if there may be some small problems in the future.