Pension Funds in Bankruptcy: The Spendthrift Trust Safe Harbor
34 Pages Posted: 24 Mar 2015
Date Written: 1991
This article describes the dual objectives of bankruptcy: the financial rehabilitation of debtors and the satisfaction, to the greatest extent possible, of creditors' claims. The first objective promotes the "fresh start" notion, by holding some of debtors’ assets outside the reach of creditors, thereby preventing the bankrupt from becoming a ward of the state. Leaving the debtor with no post-bankruptcy assets would make the promise of a fresh start merely illusory. In contrast, the second objective implies that, in satisfying their claims, creditors should have the benefit of everything the debtor owns upon entering bankruptcy.
A recent debate focuses on the juxtaposition of these dual bankruptcy objectives and the policy encompassed by the Employee Retirement Income Security Act of 1974 (ERISA). ERISA plans and similar pension plans encourage and protect accumulated savings for retirement years. Whether such pension assets are subject to creditors' attachment in bankruptcy is the topic of continued legal debate.
This article focuses on the pension fund as a spendthrift trust issue, tracing the history of the bankruptcy and pension policies involved in this conflict in Section I. Section II provides a brief introduction on the types of relief available to debtors through bankruptcy. Sections III and IV trace the evolution of the bankruptcy laws' treatment of property excluded or exempt from the estate, with a focus on early cases that dealt with employment-related property and pension plans. Section V explains section 541(c)(2) of the Bankruptcy Code, which carves out the spendthrift trust "safe harbor," one of the Code's possible protections for pension assets in bankruptcy. Section VI highlights various pension plan options, and Section VII presents a survey of bankruptcy cases based primarily in Florida that focus on the issue of pension plans as spendthrift trusts. The article closes by suggesting a statutory solution in the nature of a spendthrift trust rollover statute with a caveat about ERISA preemption.
Keywords: Bankruptcy, ERISA, Safe Harbor, Creditor, Debtor, Florida Law, Finance, Financial Rehabilitation, Pension Fund, Employee Retirement Income Security Act of 1974, Post-Bankruptcy, Exempt, Property
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