J Thomas Black
Board Certified, Consumer Bankruptcy Law- Texas Board of Legal Specialization

I previously wrote about this case when it was decided in the bankruptcy court by U.S. Bankruptcy Judge Jeff Bohm. Judge Bohm held that if you claim an IRA or Individual Retirement Account as exempt under Texas law, and take it out of the IRA during a bankruptcy it is only exempt for 60 days, unless you roll it over into another IRA within 60 days as permitted by the Tax Code.

As Texas Property Code Section 42.0021(c) states, "Amounts distributed from a plan, annuity, account or contract entitled to an exeptoin under Subsection (a) are not subject to seizure for a creditor's clam for 60 days after the date of distribution if the amounts qualify as a nontaxable rollover contribution under Subsection (b)." So if you don't roll the IRA distribution over within the 60 days, it becomes non-exempt and must be turned over to the trustee for distribution to creditors. In re Hawk, Case No. 13-37713, U.S. Bankruptcy Court, SD Texas (2015).

Anyhow, this decision was appealed to the U.S. District Court, and the district court has affirmed the bankruptcy court. Hawk v. Engelhart, Civil Action No. H-15-914, U. S. District Court, SD Texas (2016).

I have spoken to one of the chapter 7 trustees about this case, and at least this one trustee that I spoke with indicated that they do not intend to play "gotcha" with retirees, and try to take the regular I.R.A. distributions that they must take from their I.R.A.'s to live on. They will only go after large distributions that are taken out and then not rolled over within the 60 day period. In the Hawk case, the debtor had filed bankruptcy and then taken $133,434.64 out of their I.R.A., and not rolled it over.

So if you file bankruptcy and claim your I.R.A. as exempt using Texas state law exemptions, do not withdraw a lump sum from your I.R.A. during the bankruptcy, until the bankruptcy is over and closed. Not only should the discharge have been entered, but you want the case to actually be closed, with the Final Decree entered. I'm not sure why people would want to take out a lump sum from an I.R.A. anyway and not roll it over, it seems like it would cause a big tax liability. But I'm sure people have reasons why they need a lump sum of money. If you take a lump sum out while you are in bankruptcy, your creditors may wind up with the money instead of you.

Do you think this is the way the law should be? Most lawyers would have thought that once exempted, IRA's were safe forever. Should the law be changed? Or should bankruptcy trustees be allowed to seize IRA money if it is taken out and not re-invested within 60 days? Please let us hear your comments or questions below!

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