5th Circuit: Funds Held in IRA Lost Exempt Status When Debtor Withdrew Funds, but Did Not Complete a Rollover of the Funds into another IRA, as Required by State Law

5th Circuit: Funds Held in IRA Lost Exempt Status When Debtor Withdrew Funds, but Did Not Complete a Rollover of the Funds into another IRA, as Required by State Law

After filing for Chapter 7 bankruptcy, the Debtors claimed an exemption for funds held in an individual retirement account (“IRA”). The Debtors sought to exempt the funds from the bankruptcy estate because tax-exempt or tax-deferred assets held in a qualifying retirement account are generally exempt from creditors’ claims under state law. However, the Debtors  subsequently withdrew the funds from the IRA and did not roll them over into another IRA. State law provides that funds withdrawn from a retirement account remain exempt only if rolled over into another retirement account within sixty days.

On December 15, 2013, the Debtors filed a voluntary bankruptcy petition under Chapter 7 of the Bankruptcy Code. Approximately one month later, the Debtors filed their schedules of assets, which claimed an exemption for funds held in an IRA managed by NFP Securities, Inc. The Debtors claimed that the IRA funds were exempt from creditors’ claims under state law and were therefore excluded from the property of the bankruptcy estate under 11 U.S.C. § 522(b). The meeting of creditors was held on March 28, 2014, giving the parties in interest until April 28, 2014, to object to the Debtors’ claimed exemptions. See Fed. R. Bankr. P. 4003(b)(1). No party in interest objected to the IRA exemption during that time. On April 3, 2014, the Trustee filed a report declaring that the estate had no assets available for distribution to the Debtors’ creditors and proposing to abandon all nonexempt assets. In May 2014, however, one of the Debtors’ creditors, Res-TX One, timely filed an adversary proceeding objecting to the Debtors’ discharge.

Meanwhile, between December 11, 2013, and July 14, 2014, the Debtors withdrew all of the funds from the IRA and used most of those funds to pay for living and other expenses. The funds were never rolled over into another retirement account. When Res-TX One deposed Husband-Debtor in November 2014, he stated that approximately $30,000 of the liquidated IRA funds remained in his possession and that the funds were being held “in a shoebox.” The Trustee first learned about the liquidated IRA funds from Husband-Debtor’s deposition and subsequently demanded that the Hawks give the funds to the estate. After the Hawks refused to do so, the Trustee filed a motion with the bankruptcy court seeking to compel the Debtors to turn over the funds.

The bankruptcy court held an evidentiary hearing and then ordered the Debtors to turn over the funds that were withdrawn from the IRA ($133,434.64 in total). The bankruptcy court concluded that the funds “lost their exempt status” under state law because the Debtors “did not roll them over to another individual retirement account within 60 days.” The Debtors appealed to the district court, which affirmed the bankruptcy court’s decision. This appeal
followed.

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