The Hawks filed chapter 7 bankruptcy and claimed as exempt their $130,000 IRA account under Texas law. After the filing they took the money out of their IRA and did not reinvest it in another tax-qualified retirement plan within 60 days, as Texas law requires. A creditor objected, and the bankruptcy and district courts ruled against the debtors.

On appeal, the Fifth Circuit Court of Appeals held that assets in an individual retirement account lose their exempt status if  the assets are withdrawn after filing a bankruptcy but not reinvested into another tax-qualified plan within 60 days as required by Texas law. It means that debtors that choose Texas exemptions to exempt their IRA or other retirement plan cannot take money from it during a bankruptcy until the bankruptcy is closed, unless they reinvest it in another tax-qualified account within 60 days, or they risk losing the money to their creditors.

As the court stated: "Texas law clearly placed a limitation on the Hawks’ IRA exemption during the pendency of the bankruptcy proceeding: if the Hawks elected to receive a distribution from the IRA, they needed to reinvest those funds in another retirement account within sixty days or else lose their exemption. See Tex. Prop. Code § 42.0021(a), (c)."

Do you think this decision is correct? Or once exemptions are claimed and allowed, should they be considered final? Please leave your comments or questions below.

J Thomas Black
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Board Certified, Consumer Bankruptcy Law- Texas Board of Legal Specialization
This 5th Circuit opinion was withdrawn. The Court reversed and remanded the District Court, holding that in chapter 7 cases, once the exemption of an asset has been properly claimed and allowed, the asset is withdrawn from the estate and cannot be brought back into the estate even if the asset changes form.
by J. Thomas Black September 6, 2017 at 08:06 AM
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