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Court Finds $133,000 Withdrawn from IRA after Bankruptcy Filed Must Be Reimbursed

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interest to Indiana bankruptcy petitioners, a federal court of appeals considered whether debtors had to return money withdrawn from an individual retirement account (IRA) after the bankruptcy case was filed.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.

Stacks of CashUnder 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to the exemption, contending that the debtors had to turn over to the bankruptcy estate the $133,434.64 that was withdrawn from the IRA.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.

The Fifth Circuit Court of Appeals, however, held that the IRA funds were not permanently removed from the estate when they were deemed exempt. The exemption was conditional because the state placed a limitation on the debtors’ IRA exemption while the bankruptcy proceeding was pending. That is, if the debtors decided to take their money out of the IRA, they had to reinvest the money in another retirement account within 60 days, or they would lose their exemption. Here, the debtors withdrew the money from the IRA and did not roll it over into another IRA. Therefore, the debtors could not exempt the money and were ordered to reimburse the bankruptcy estate for all of the money withdrawn from the IRA.

Exemptions from the Bankruptcy Estate

Under 11 U.S.C. 541(a), when a bankruptcy case begins, a bankruptcy estate is created. The bankruptcy estate is made up of “all legal or equitable interests of the debtor in property as of the commencement of the case.” Yet certain assets can be exempted from the bankruptcy estate. Other parties can then object to the exemptions and generally have to object within 30 days. Exemptions may be claimed based on federal law or on state law, depending on state law.

Are You Considering Filing for Bankruptcy?

If you are considering bankruptcy, it is essential to understand how bankruptcy will affect your life and your finances. A misunderstanding of the effect of bankruptcy can have disastrous results for debtors. A skilled bankruptcy attorney can guide you through the process to help you avoid these mistakes. The experienced Louisville and Southern Indiana bankruptcy attorneys at the Schwartz Bankruptcy Law Center can help you through the complex and daunting Bankruptcy Code. To schedule your free initial consultation, call our Louisville office at 502-485-9200, our New Albany office at 812-945-9200 or toll-free at 866-366-3328, or contact us online.

More Blog Posts:

Failure to List Home Results in Revocation of Discharge 15 Months Later, Kentucky Bankruptcy Lawyers Blog, published July 14, 2017.

Court Holds Debtor Can Claim Exemption for over $14,000 in Health Savings Account, Kentucky Bankruptcy Lawyers Blog, published August 10, 2017.

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