ERISA Retirement Plans in Individual Bankruptcy

When an employee covered by an ERISA retirement plan files a petition in bankruptcy, the court is presented with a number of complex issues regarding the relationship among ERISA, the Bankruptcy Code (Code), and the state law of creditors’ rights. Three issues have emerged in these cases, and the courts have divided on the proper resolution of each of these issues. First, is the debtor’s interest in an ERISA retirement plan “property of the estate,” and thus available for distribution to creditors? Second, if the debtor’s interest is property of the estate, and the debtor uses the state exemption scheme, is his interest nevertheless exempt in bankruptcy because it is “exempt under Federal [nonbankruptcy] law?” Third, if the debtor chooses the federal bankruptcy exemption scheme, is his interest in the retirement plan exempt under the section exempting his “right to receive a payment” under a retirement plan, “to the extent reasonably necessary for the support of the debtor?”

Although this Article explores each of these issues in turn, it is not possible to develop a logical and consistent approach to the treatment of ERISA retirement plan benefits in bankruptcy without considering each issue in light of the other two, and in light of the rights of creditors in the nonbankruptcy context.