In a recent case of interest to Indiana bankruptcy petitioners, a federal court of appeals considered whether debtors had to return money withdrawn from an individual retirement account (IRA) after the bankruptcy case was filed. The debtors (a husband and wife) filed for Chapter 7 bankruptcy and claimed an exemption for money in an IRA account. After the debtors claimed the exemption, no party objected to the claimed exemptions, and the IRA money was deemed exempt. However, it later became known that the debtors withdrew all of the money from the IRA and used the money after filing for bankruptcy.
Under that state’s law, money held in an IRA is normally exempt from the bankruptcy estate because tax-deferred or tax-exempt assets in an IRA are generally exempt from the bankruptcy estate. However, under that state’s law, the money in an IRA is only exempt if it is rolled over into another retirement account within 60 days.
In this case, the debtors did not put the money into another retirement account. One party later objected to the exemption, contending that the debtors had to turn over to the bankruptcy estate the $133,434.64 that was withdrawn from the IRA. The debtors argued that since the money was already deemed exempted, it was permanently removed from the estate.