If you are having trouble paying your mortgage, you may be worried that your retirement assets are at risk. The specifics vary by state law. A number of states restrict mortgage lenders' ability to collect on assets other than the home itself. Additionally, Congress has granted a good deal of judgment protection to retirement accounts, including individual retirement arrangements.
IRAs and Creditor Protection
Federal law exempts the first $1 million in IRA assets from the claims of creditors. This is as a result of the Bankruptcy Reform Act of 2005, which also made it more difficult for debtors in some circumstances to qualify for bankruptcy, especially under Chapter 7. Some states provide additional protection to IRA accounts via state law. IRA protection is unlimited in the state of New York.
Recourse and Nonrecourse
Some states restrict mortgage lenders from pursuing borrowers for money in excess of the value of the foreclosed home. These states are called nonrecourse states. If the lender forecloses and then sells a home, and the sales proceeds are not enough to pay off the debt outstanding, lenders in nonrecourse states do not have recourse to sue to attach other assets. These states include Alaska, Washington, Arizona, Utah, California, Texas, Connecticut, North Dakota, Florida, Idaho and Minnesota.
Foreclosure in a Recourse State
If you do not live in a non-recourse state above, you could owe the difference between your loan balance and the sales proceeds of the home after a foreclosure. If so, the lender could sue you for the difference. If the lender wins, you will have a judgment against you, and you can even be forced into bankruptcy. However, even if the lender has a judgment, you cannot be forced to surrender anything in your IRA up to $1 million, and in some states, even more than that.
Alternatives
If your IRA has more than $1 million in it, some of that money may be at risk, depending on your state. You may wish to move a portion of your IRA into annuities, which may receive additional creditor protection under state law, or keep a balance in a 401k plan rather than rolling it over into an IRA. 401k plans have unlimited creditor protection. Consult an attorney before making any transfers under creditor pressure, because transfers made solely to shield money from legitimate creditors can sometimes be ruled "fraudulent conveyances," and disallowed by courts. In some circumstances, you can save a home, or at least buy time to catch up on mortgage payments, by filing for Chapter 13 bankruptcy.
