One the Edge of Losing Ground: Bankruptcy

The latest employment numbers are showing a slight increase in jobs. That's small comfort for the enormous group of folks who are still unemployed.

With over ten percent of us out of work, another eight percent of us no longer bothering and an estimated twenty percent of us contemplating the possibility that we might lose everything we have worked so hard for, the subject of who owns what as we consider our options in an economy that doesn't seem to be recovering fast enough to suit most of, the question of your 401(k) as part of a bankruptcy is worth asking.

The choice of bankruptcy is always the last option. When you consider this option, you will find your assets under the control of the bankruptcy estate while your case is pending. You still own these assets. Your home is protected providing you can make the payments and if your home is worth more than your mortgage, the bankruptcy estate will exclude up to $37,500 in equity from consideration. The same applies to any equity you might have in your car.

The concept for exempting these two items is relatively straightforward. How could you possibly hope to recover from bankruptcy if you were stripped of these items? Understanding the need for shelter and transportation is important. But does the most valuable asset protecting your future fall under the same consideration?

Although you will need a bankruptcy attorney to guide you through the maze of rules, the focus of such an action is to come to some sort of agreement with your creditors on how you will repay what you owe. In some instances, it might be the forgiveness of your interest obligation in favor of satisfying the debt. Repayments plans and schedules are worked out and as long as you follow those obligations, you can remain under the roof that you own and be able to get to and from work.

The question of your 401(k) however is not so clear-cut. And the answer depends on ERISA qualifications. Section 541(c)(2) of the Bankruptcy Code. Section 541(c)(2) provides: “A restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable law is enforceable in a case under the Bankruptcy Code.”

This means that your 401(k) is safe from the actions of bankruptcy court and cannot be considered when determining the value of the estate. If you plan falls under ERISA protection, and generally this qualification applies to most larger company plans, your assets are safe. The exception however, effects the smaller business owner.

Among the exceptions to this rule is a retirement plans that has only one participant, such as single employee corporate plans, and some other plans originating in self employment. These plans may be property of the estate. They may be vulnerable to creditors. When you consider the number of small businesses affected by the economic downturn, this is an important exemption.

For those of you who do have a plan that is exempt, the ownership of this property has found its way to the US Appeals Court. The question posed by the case dealt with the loan that was borrowed from a 401(k). Although the person was obligated to pay back the loan, the loan payment was questioned.

Chapter 7 bankruptcy subjects the estate in question to a means test. This sorts out what is qualified and what is not in terms of "necessary expenses". The loan repayment to the 401(k) was challenged. The court, ruling in the case of Egjebjerg v. Anderson found that the repayment to the 401(k) was the same as a contribution to that person's plan. In other words, if you loan money to yourself, the repayment of that loan is not considered a debt under the law.

The plan has not right to sue for repayment of the 401(k) loan but can, according to the court, offset the loan against future benefits. But the court that while Chapter 7 proceedings did not cover the individual, Chapter 13 would consider the repayment as part of the debt owed. This subtle difference is important and makes the consideration of good representation a must for anyone considering such a drastic move.

It is important to consider all of your options before subjecting your finances to estate scrutiny. And secondly, borrowing from your 401(k) is still a bad idea. In a Chapter 7 proceeding, the losses to that important linger far into the future. And while Chapter 13, often referred to as the wage-earners plan, does allow for the repayment of that loan under the court's approved structure, the loss of earnings in the retirement plan will have lingering effects long after you emerge, finances revitalized.

Paul Petillo is the Managing Editor of Target2025.com

A Year in the Life of Labor

I would be willing to wager that the vast majority of workers had no idea what the unemployment rate was a year ago on Labor Day. It would probably be a safe bet that most of you know now.

Our perception of what labor is has changed greatly in the short space of twelve months as we have watched the financial world shift from one of prosperity to one of uncertainty. This has affected one in ten Americans while shattering the hopes and dreams of the remaining workforce. Retirement goals have been altered. Companies have moved from prosperous thinking to cost-cutting seemingly overnight.

A year later, after the collapse of Bear Stearns and the pratfall that was Lehman Brothers, bailouts and bad investments headlined the news reports. If you had no idea who the head of the Treasury was, the evening news was there to tell you. So much financial information was suddenly dominating the news that it became pornographic: impossible to describe but easy to recognize.

For months, you got up in the morning and went to work, weighed down by the possibility that you might be among the fallen 10%, that you might be forced to take a wage cut or freeze, that your mortgage might not be sustainable and that all of the stability that kept you moving forward was no longer solid footing. But you went anyway. You didn’t need to be told things were bad and possibly getting worse; you simply felt it. It was palpable.

So a year later, as we observe another Labor Day, most of us wonder whether we will ever be the same. Will we ever get back to the days of endless optimism, hope for the future and the possibility that our children will no longer see the anxiety in our eyes?

Capitalists observe Labor Day in a far different way than those employed. Abraham Lincoln once said: "Labor is prior to, and independent of capital. Capital is only the fruit of labor, and could never have existed if labor had not first existed. Labor is the superior of capital and deserves much the higher consideration."

Business disagrees. And labor laws suggest that they have the lobbying power to make those differences greater, in essence creating a far wider schism between who produces and who finances that production.

2009 we will come to find out is the year when the recession has subsided. Yet, the replenishment of those lost jobs may not come for another twelve months. This will be referred to, long after it is over as a jobless recovery. This is an economic reference that flies in the face of what normally occurs. When things begin to turn around, businesses are forced to ramp up production to fill the void in inventories. No one can sell an empty shelf.

But so far, and in all likelihood, in the near future, this will not or has not happened. White-collar workers are seeing work loads increase, sometimes due to attrition (workers retiring or taking buyout options) and layoffs. Unions around the country, particularly those associated with troubled businesses such as autos or publishing have made concessions that during the good times would not even have been considered.

Rest assured, we did not create the situation we are in, despite the reasoning the many employers, economists and financial experts offer to the contrary. Their view of who we are, albeit convoluted, is based on a long history of class struggle, the belief that the poor are poor because of who they are and not what they did, and the fact that the land of opportunity, something all business suggest is applied equally to all workers, is alive and well.

The result of this type of thinking, supported by poorly written histories of labor and the struggles of unions over the last hundred years has deepened the stratification of our economy.

In 1970, the classes and the incomes associated with status in the United States closely resembled those of Canada. In the short space of forty years, the resemblance is more akin to those social classifications of Mexico. This is due in large part to how those in business (lobbying for empathetic support from the government) view the root causes of poverty, the opportunities that this land was supposedly blessed with and the chasm that has grown both in terms of incomes and jobs.

This Labor Day should be celebrated as a turning point. We have a government that is doing what no other administration has ever done in this century. And while the cost is high, the result will be a change in attitude in how labor is viewed by not only the workers but also those that employ us. It may be short in duration, as many financial cycles tend to be. But it will be a lesson worth noting long after 2008 becomes a footnote in the history books.

The 401(k) Returns... Almost

Your 401(k) is still in trouble. As the stock market rallies (although some think that September and October, historically bad months for the stock market will correct this), as the economy recovers (although consensus agrees for the most part that the recovery is not so much a bounce as a leveling off) and as unemployment remains the lagging indicator (along with housing), the effort at funding your future through your 401(k) languishes. Why? The employer is seeing that incentive to invest, the 401(k) match as not worth reinstating to pre-2008 levels.

For those of you who may not be aware, the 401(k) replaced the pension decades ago as companies divested themselves as guardians of your future. Pensions were the repayment for loyalty, human capital and profits. The 401(k) on the other hand was directed by the employee. Business used the incentive of the company match, a dollar for dollar investment up to a certain percentage as a way to encourage loyalty, human capital and profits.

Then the economy turned sour. And in the process of cost cutting, many companies eliminated or greatly reduced their company match. The question is: will matching of employee contributions ever return?

The short answer is yes. The long answer is: they will no longer resemble the employer contributions we have all become used to receiving.

Businesses face two problems when they decide to cut their 401(k) match. Neither is very appetizing and may even cost the company more than they bargained for.

For most plans, reinstating their 401(k) will not happen until 2011. Because of what is known as a safe harbor rule, reinstating the company match needs to be in the books by November of the previous year. To take effect in 2010, companies will need to feel as though the economy is on stable footing. This is not yet clear and may not be clear by the fall.

If the economy recovers at a faster pace than anticipated and jobs begin to return before 2011, the competition to get and in many cases retain good employees by offering these incentives will be missed. This could be a costly mistake for businesses looking to get and keep quality workers.

If the economy merely levels off, these employers will have time to see if some new techniques, currently being offered by Starbucks, might be the way of the future. Starbucks is breaking the mold for 401(k) plans by changing the incentive to profit based contributions. In other words, the company does better and in return, you get something for your retirement besides what you invested.

Will it work? Will other businesses follow? Possibly yes to both. The current corporate thinking is leaning towards less incentives believing that their plans were too generous in the first place. If your company has struggled through these tough economic times, particularly if you are associated with the automotive industry, those incentives, many experts agree, will never return.

A great number of other industries are planning to ease back into the incentive by offering substantially less in matching contributions and promising to raise those levels once they are assured the economy has recovered.

Some may simply be waiting to see of the Starbucks model works.

Does this mean the end of the 401(k)? No. Instead, you will have to earn more, put away more and invest with slightly more risk than you would like to assume. This means keeping your money out of staid index funds and target-dated funds in favor of investments that could do better. For some, this will be re-entering a high-risk investment model that did not pay off previously, evidenced by the cutting many nest eggs by a third or more when the market soured.

The next year will prove to be among the most interesting of the recovery.