The bankruptcy of the ER is a different situation. Since amounts deferred under a nonqualified plan remain subject to claims of the ER’s general creditors, secured creditors will first be paid in full, and plan participants are merely among the unsecured creditors waiting in line for any amounts that may be left over. Therefore, when the sponsor of a nonqualified plan goes into bankruptcy, the plan participants typically receive only pennies on each dollar owed. In some cases, they receive nothing. This rule applies to amounts voluntarily deferred by the EE out of his salary as well as any ER money that may have been contributed.Importantly, assets in a rabbi trust must remain subject to the claims of the ER’s creditors. Under the terms of a rabbi trust agreement, the ER is obligated to notify the trustee in the event of its insolvency, inability to pay debts as they become due, or pending bankruptcy.. If the ER becomes bankrupt or insolvent, the funds held in the trust are subject to the claims of the ER’s creditors. The ER cannot take income tax deductions for its contributions to the trust until the funds in the trust are actually distributed to the EE.