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IRA account was exempt from bankruptcy despite trustee's objection

Filing for a Chapter 7 bankruptcy can provide a fresh start from the burdens of unmanageable debt. A bankruptcy filing will also protect some of your assets, including retirement accounts.
 
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    February 20, 2014 /24-7PressRelease/ -- IRA account was exempt from bankruptcy despite trustee's objection

Article provided by C. Edwin Shoemaker, Attorney at Law
Visit us at http://www.ceshoemakerlaw.com/

Filing for a Chapter 7 bankruptcy can provide a fresh start from the burdens of unmanageable debt. A bankruptcy filing will also protect some of your assets, including retirement accounts.

Generally, an individual retirement account is off limits from tax collectors and creditors in a bankruptcy proceeding, unless the retirement account is used in a prohibited way. The United States Court of Appeals case of In re Daley provides an example of that protection.

Debtor opens an IRA account

The debtor had opened an IRA with an investment company by rolling over proceeds from another financial institution. As part of that process, the debtor had signed the company's "Client Relationship Agreement."

Two years later, the debtor filed for Chapter 7 bankruptcy, and sought to exempt the IRA from the proceedings. The bankruptcy trustee--the individual tasked with administering the bankruptcy--objected to the exemption, arguing that the retirement account had been used in a way prohibited under the law. Specifically, the trustee argued that the Client Relationship Agreement had contained a provision which provided that the debtor was pledging his IRA account as security for any future debts to the company.

The debtor had never had any debts with the company, at the time he opened the account or later, yet the Bankruptcy Court agreed with the trustee. The debtor appealed, seeking to protect his IRA.

Was there a prohibited transaction?

In reviewing the case, the Sixth Circuit Court of Appeals explained that a debtor can keep retirement funds out of the hands of creditors if those funds are placed in an account that is exempt from taxation. However, an IRA can lose its special status in a bankruptcy if the owner of the IRA engages in certain prohibited transactions, one of which is any direct or indirect lending of money or extension of credit between the IRA and its owner. The question was whether the debtor had used the IRA to obtain credit from the company, on the basis of the provision contained in the Client Relationship Agreement.

The reality here was that the debtor never received a loan from his IRA and the company never extended any credit to the debtor based on the IRA. The fact that the company might have had the right, under the contract, to some of the proceeds in certain circumstances--such as if the debtor had owed them money--did not establish that an extension of credit had actually occurred here. The debtor never opened any other accounts with the company, whether for margin-trading or anything else.

The mere existence of this provision--often referred to as a "cross-collateralization agreement"--did not destroy the IRA's exempt status. The debtor had simply signed an agreement that contained a boilerplate provision in order to open an account. Thus, the debtor's IRA account would be exempt from the bankruptcy proceedings and the lower court's decision was reversed.

Seeking bankruptcy relief

If you are suffering under a heavy debt load, a bankruptcy action may be your best option. You should consult with an experienced bankruptcy attorney who can carefully review your individual circumstances and advise you on the best way to seek relief while protecting your assets.



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