Tuesday, August 22, 2017

Fifth Circuit Rules on Exempt Characterization of Proceeds of an IRA

By Bill Siegel

Generally speaking, in Texas, IRAs are exempt from seizure.  There is no limitation on the amount of the exemption in terms of dollars as long as the individual does not file bankruptcy.  If a bankruptcy is filed, however, the Bankruptcy Code places a current dollar limit on the claimed exemption of $1,283,025.  Until recently, there was a split in authority as to the exempt status of proceeds of an IRA if those proceeds are withdrawn during the course of a bankruptcy and not reinvested in an IRA or homestead within the 60 days as required under Texas Law in order to remain exempt.  


The Fifth Circuit Court of Appeals recently resolved this issue by ruling*1  that the proceeds of the IRA lose their exempt status if not reinvested in a homestead or another IRA.  In the case before the Court, during the course of the debtors’ Chapter 7 bankruptcy, the debtors, husband and wife, withdrew $130,000.00 from their IRA.  The court ruled that an exempt asset is property of the estate but simply holds the status of being exempt from seizure.  In this case, because the debtors failed to reinvest it in another exempt asset, i.e. their homestead or an IRA, the proceeds lost their exempt status and became property of the bankruptcy estate.


This case seems to imply that, whether the case is a Chapter 7 liquidation or a Chapter 13 individual reorganization, debtors need to wait at least until the case is officially closed before they withdraw proceeds from their IRAs and even then, if the case is reopened, the debtors risking losing the proceeds from their IRAs.  Otherwise, creditors or the trustee can require the debtors to turn over the withdrawn proceeds and arguably, any property that may have been acquired with said proceeds.


Stay tuned as a petition has been filed for rehearing en banc.  The petitioners argue that no exemption is safe if sold after bankruptcy especially if there is no law that requires them to reinvest the proceeds within a certain period time.  Petitioners further argue that the current ruling ignores the “snapshot rule” where exemptions are determined as of the date of filing.  If no objection is filed to the exemption, then the exemption becomes final.  At this point, the safe route would be don’t sell exempt assets at least until the bankruptcy case is closed.


*1. Hawk v. Engelhart (In re Hawk), 16-20641 (5th Cir. July 19, 2017).


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