State laws determine whether a lender can initiate collection activities on a balance that remains after a foreclosure sale. As of this publication, 12 states prohibit lenders from collecting on a deficiency balance at all. Although laws in the remaining 38 states allow mortgage lenders to sue you, and file a motion to garnish wages and funds held in bank accounts, most retirement funds are exempt from garnishment.
Exempt Retirement Funds
Federal and State Benefits
A judgment lender can’t garnish federal retirement benefits to collect on a foreclosure deficiency balance. These include Social Security, military retirement pay and annuities, and railroad retirement benefits.
State retirement benefits also are exempt from a foreclosure garnishment order. These include state police and teacher’s retirement pay. Additionally, funds held in a 403(b) annuity retirement plan are exempt.
Employer-Sponsored Retirement Plans
The federal Employee Retirement Income Security Act of 1974 stops judgment lenders from garnishing employer-sponsored retirement benefits to settle any past due debt, including a foreclosure deficiency balance. The federal law preempts any state laws that may exist, therefore, funds in a pension plan, as well as funds in ERISA covered plans -- including 401(k), Savings Incentive Match Plans for Employees of Small Employers, and Simplified Employee Pension plans -- are safe from garnishment.
Self-Directed Retirement Plans
Federal laws do not protect money held in traditional or Roth Individual Retirement Accounts. This includes money rolled or transferred to an IRA from an ERISA-protected plan. For example, if you roll funds from an old 401(k) plan into a traditional IRA, federal laws won't protect the rollover or transfer from a foreclosure garnishment order. However, some state laws do protect IRA funds from garnishment.
Claiming Retirement Plan Exemptions
Co-mingling retirement money with other funds in a savings or checking account could mean these funds will be included if the bank freezes your account after receiving a garnishment summons. If this happens, you have a short window in which to file a Claim of Exemption to show that certain funds in the account are exempt.
Each state specifies its own time window for filing an exemption claim.