The Lerbakken Case: On Retirement Funds and Bankruptcy

Retirement funds are crucial to millions of Americans, but they may not always be protected from bankruptcy creditors.

Recently, an Appellate Panel heard a case of a man who filed for bankruptcy (Lerbakken, Bankruptcy App. Panel, 8th. Cir.). Lerbakken, the Appellant, argued that his 401K and IRA accounts should be exempt from bankruptcy creditors. However, Lerbakken was awarded both accounts in a divorce settlement from his ex-wife four years before he filed for bankruptcy.

The law states that retirement funds such as 401Ks and IRAs worth up to $1,283,025 are exempt from bankruptcy creditors, and Lerbakken argued that his accounts should be protected because they qualify as retirement funds. It is worth noting that he neither created nor contributed to either retirement fund, as they were both property of his ex-wife before their divorce.

The Court ended up ruling against him. They determined that the exemption for retirement funds only applies to people who created and contributed to the funds, not to people like Lerbakken who were awarded these funds in a settlement.