Bankruptcy Blues

The company I work for has been having a lot of financial troubles recently. What will happen to my retirement plans and health insurance if my employer files for bankruptcy? K.L., via e-mail

That depends on whether your company files for bankruptcy under Chapter 11, which would allow it to restructure, or under Chapter 7, which would shut down the company. In the case of Chapter 11, your benefits may not be affected, although it's more likely that you'll face cutbacks even if your company continues to operate. Under Chapter 7, your benefits would be terminated.

In either case, a number of laws protect the benefits you've already accrued and can help you find health coverage. For example, assets in your 401(k) must be held in a separate trust that neither an employer nor its creditors can touch. If your employer files for Chapter 11 bankruptcy, it could continue to administer the 401(k) plan, but it may discontinue matching contributions. If the company closes, the 401(k) will be liquidated and the assets distributed to participants, after which you can roll over the money into an IRA.

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With regard to your pension plan, the bankruptcy court decides whether a company can continue to cover its obligations under Chapter 11. If the answer is no, or if the company shuts down, the pension plan will be dissolved. The Pension Benefit Guaranty Corp. guarantees benefits up to $51,000 per person per year in 2008 for people retiring at age 65; the guarantee is lower if you retire earlier and higher if you retire later (for details, go to www.pbgc.com).

Your health-insurance coverage may continue if your employer files for Chapter 11 bankruptcy. If you lose your job but your employer is still offering health insurance to its remaining employees, you may continue your group coverage for up to 18 months through the federal COBRA law.

Retirees are also eligible for COBRA coverage if the company continues offering insurance to current employees. Remember, though, that healthy individuals may find a better deal on their own. Check policies at eHealthInsurance.com or through an individual agent at www.nahu.org.

If your employer discontinues its health insurance, you won't be eligible for COBRA. But you may be able to sign up for your spouse's plan or convert to individual coverage without being excluded for a preexisting condition. Policy-continuation rules vary by state; go to our insurance page to find a link to your state insurance department's Web site.

Risky gift cards. I was given several gift cards as Christmas gifts. If one of the companies files for bankruptcy, what happens to its gift card? And what if I make a down payment with a company that goes belly up? H.T. Milwaukee

In both cases, you could lose your money. Rules vary depending on the type of transaction and the bankruptcy court's decision. For example, retailers can ask the court for permission to honor gift cards even after they've filed for bankruptcy.

The court allowed Circuit City and Linens 'n Things to accept their own cards. Circuit City is reorganizing and still doing business; Linens 'n Things is closing all its stores. "Gift cards are valid as long as the stores are open," says Linens 'n Things spokesman Rich Tauberman.

If a company doesn't ask the court to continue honoring its cards, or if the request is denied, the cards generally become worthless as soon as the company files for bankruptcy protection. So if you have a gift card with a retailer that's experiencing financial trouble, use it as soon as possible.

If you've made a down payment on an item and the company goes belly up, you may have a tough time getting your money back. For down payments made with a credit card, you can dispute the amount if it shows up on your bill before you receive the merchandise, says Eric Friedman, director of the Montgomery County Office of Consumer Protection, in Maryland. If the item never arrives, ask the card issuer to remove the charge.

You have less recourse for down payments made with cash or by check. For help, contact your state or local consumer-protection agency at www.consumeraction.gov.

If you don't get either your item or your money, you should file a "proof of claim" in the merchant's bankruptcy case, advises Geoff Walsh, of the National Consumer Law Center. "At a minimum, you'll be in the loop for notices about the proceeding."

Sell my Ford note? I own a Ford fixed-rate note that matures in 2010. Should I sell it now? Eli Gruber, East Windsor, N.J.

The good news is that you're holding what's known as a senior issue. That means that in any Ford restructuring plan, including what could come out of a bankruptcy reorganization, you'll be ahead of other bondholders (and shareholders) when it comes to staking a claim on any future payouts, says Robert Wasilewski, a portfolio manager at Baltimore-Washington Financial Advisors, in Columbia, Md. Still, if Ford and other automakers do end up in Chapter 11, what you would walk away with is anyone's guess. The same holds true if Congress appoints an auto czar to negotiate a restructuring plan. In other words, your decision is a bit of a crapshoot.

The note, which pays annual interest of 5.7%, originally sold in units of $1,000. But in early December it fetched only $713 (to track the bond, go to www.finra.org/investors, click on the "Market Data" tab, and enter its symbol, F.GLY, in the search box). The price drop reflects investors' concern about a possible Ford bankruptcy. At its current price, the note yields 41% to maturity in January 2010, a figure that assumes full repayment of principal and underscores that the notes are highly speculative.

So your choice is to sell at a big loss or to hold on -- and risk further losses -- in hopes that Ford will make good on its obligation. If your holdings are a small part of your overall investments or you have a high tolerance for risk, go ahead and roll the dice. But if you can't afford significant additional losses, sell now.

Upside of lower income. I usually earn too much to contribute to a Roth IRA. But I lost my job a few months ago, so my income for 2008 is a lot lower than it has been in previous years. Can I contribute to a Roth? A.S., Boston

Not only might you be able to contribute to a Roth IRA, but you could also be eligible for other tax benefits.

You can contribute up to $5,000 to a Roth IRA if your adjusted gross income for 2008 was less than $101,000 if you're single or $159,000 if married filing a joint return (the limit rises to $6,000 if you're 50 or older). The contribution gradually phases out until your income reaches $116,000 if single or $169,000 if married filing jointly. You have until April 15, 2009, to contribute to a 2008 Roth IRA.

You do need some earned income to qualify for a Roth, and you cannot contribute more than your compensation for the year. However, if you were unemployed for the whole year but your spouse had a job, he or she may be able to contribute to a spousal Roth IRA on your behalf, as long as your combined income was less than the Roth cutoff.

With a lower income, you may also qualify for other benefits, such as the retirement savers' tax credit. You can receive a credit of up to $1,000 if you contributed to an IRA, a Roth IRA, a 401(k) or another retirement plan and your adjusted gross income in 2008 was less than $26,500 if single or $53,000 if married.

And if you have a child in college, you could be eligible for the Hope and Lifetime Learning credits if your 2008 income was less than $58,000 if you're single or $116,000 if you're filing a joint return. Even if you earned more than that, you may still be able to deduct up to $4,000 for college tuition and fees depending on your income.

My thanks to Laura Cohn for her help this month.

Got a question? Ask Kim. Kimberly Lankford is the author of Ask Kim for Money Smart Solutions (Kaplan, $18.95).