Blogs

Learning of new attacks being made against debtors who own Individual Retirement Accounts I am reminded of Al Pachino's line in the last Godfather movie:  "Just when I thought I was out, they pull me back in!"    As reported by Illinois law professor Robert M. Lawless in a recent article posted on CreditSlips.org, some Chapter 7 Trustees are reopening and issue that most of us thought was finally settled in 2005 when Congress passed the latest bankruptcy reform act.  
The Bankruptcy Reform Act of 2005 states that  retirement funds held in tax exempt accounts would be protected in bankruptcy cases up to one million dollars.  Funds held in IRA accounts are exempt from federal taxation, so at last debtors could be sure that the retirement nest egg was safe. 
Some Chapter 7 Trustees are now questioning whether certain IRA accounts should be given tax favored treatment since the fine print of the account agreements allow the brokerage firm to use the IRA funds to repay other loans taken out by the debtor from the same brokerage firm.  Since the tax code prohibits tax qualified IRA accounts from making loans to the account holder, the Chapter 7 trustees argue that accounts with such loan provisions are not tax exempt and thus not protected under the Bankruptcy Code. 
The bankruptcy court for the Eastern District of Tennessee recently ruled that IRA accounts with such loan provisions are not exempt, and that case is currently on appeal in the Sixth Circuit Court of Appeals. In re Daley, 459 BR 270 (Bkcy. EDTenn., 2011).
Nebraska exemption statute 25-1563.01 states that IRA accounts are exempt from the claim of creditors "to the extent reasonably necessary for the support of the debtor and any dependant of the debtor."  Prior to the Bankruptcy Reform Act the issue commonly litigated in bankruptcy court was whether the amount held in the IRA account was "reasonably necessary" to support the debtor's family, and if the Trustees succeed in their arguments this issue will come back to life.
Until this new attack of the trustees is finally decided, I would recommend that debtor attorneys claim both the new federal exemption and the older Nebraska exemption to IRA accounts in the bankruptcy proceeding, and that they inform their clients of the possible risk they may face if they hold substantial IRA assets.
 
 
 

Bringing you the most up-to-date news, tips and blogs throughout the web. Here’s your Bankruptcy Update for May 21, 2013 Sinbad, almost $11M in debt, files for bankruptcy Battery maker B456 Systems’ bankruptcy plan approved GM Bankruptcy Proceedings Delayed by Zombie Whistleblower Case

There are exemptions available in Chapter 7 bankruptcy that may help protect your cash. Although the cash in question has to qualify as an exempt asset.  It’s common for consumers to be afraid of filing in fear of losing cash assets.  The good news is you may be able to retain your cash and other assets [...]

A study from the Fred Hutchinson Cancer Research Center in Seattle found that cancer patients are 2.5 times more likely to file bankruptcy than people without cancer.  The study was published in the journal Health Affairs.  The risk is even higher for younger cancer patients.  This confirms what bankruptcy lawyers have known for a long time: many people don’t slide into bankruptcy, they are catapulted into bankruptcy or – put another way – debt has a way of kicking you when you are down.
Cancer is an extreme example of how a sudden and unexpected life event can rocket someone into bankruptcy.  The study’s authors highlighted a few of the reasons that cancer correlates to an increased risk of bankruptcy filing: 1) cancer is extremely expensive, even with health insurance; 2) cancer treatment leads to income disruption or job loss; 3) support networks are unable to take up the slack; and 4) existing debt becomes unmanageable.  These factors, however, are just as present with any sudden and unexpected life event, not just cancer.
Debt problems have a way of kicking you when you’re down.  Most of us – bankruptcy lawyers included – have personal debt, whether it’s student loans, mortgages, car loans, or credit cards.  The bottom line is that debt is a necessary part of everyday economic existence.  What none of us want to admit is that it doesn’t take much for your economic existence to be knocked off balance.  You can be the most responsible credit card user out there and have a modest mortgage, but if you lose your income for six months, you are almost certainly going to start missing payments.
Once you start missing payments, you will begin to spiral deeper into debt.  It’s simple.  You have a mortgage, you have to pay your utilities, you have to buy food, and you go through an income disruption.  If you don’t pay your mortgage, your home will go into foreclosure.  If you don’t pay your utilities, the lights will be shut off.  You have to buy food.  Even at that minimal level of existence, it is easy to spiral into debt if you lose your income for even a few months.
Most of my clients have been financially responsible their whole lives.  It just takes a few months of financial disruption like lost income or unexpectedly large medical bills for them to spiral into debt and end up in bankruptcy.  The bottom line is that any kind of disruption whether it is extreme and life threatening like cancer, a layoff, a furlough at work, or anything that radically increases your expenses or radically decreases your income can put the most responsible person into bankruptcy.