In 2014, the Fifth Circuit held in a chapter 13 case called Frost that proceeds from the sale of a homestead lose their exempt status if not reinvested in another home within six months, as required by the Texas exemption statute.
A district judge in Houston extended Frost by holding that funds withdrawn by a chapter 7 debtor from an individual retirement account similarly lose their exempt status unless rolled over into another IRA within 60 days, even though the time for objection to exemptions had elapsed before the withdrawals.
The opinion on Aug. 29 by District Judge Melinda Harmon creates an exception to the “snapshot rule” calling for the determination of exemptions as of the filing date.
A couple in chapter 7 had some $130,000 in IRAs on the filing date. They withdrew the cash from the IRAs after the deadline had passed for filing objections to their claimed exemptions. The withdrawals also evidently occurred after the trustee issued a report saying it was a “no asset” case and proposing to abandon all non-exempt assets.
The debtor had claimed an exemption for the IRAs under the Texas exemption statute that requires rollover to another IRA within 60 days after withdrawal, else the funds lose their exempt status.
After the trustee learned of the withdrawals from the IRAs, she demanded a turnover of the funds. When the debtors refused, the bankruptcy judge held a hearing and ruled in favor of the trustee. At the time of the ruling, the case was open because an objection to discharge was outstanding.
On appeal, the debtors unsuccessfully argued that Section 522(c) permanently immunizes exempt property against any liability for pre-petition debts. They also contended that the snapshot rule determining exemptions as of the filing date precluded a later invasion of IRA proceeds.
Judge Harmon said there are conflicting decisions from the lower courts and no controlling authority from the Fifth Circuit. She found an analogy to Frost to be “highly persuasive.”
In Frost, she said the Fifth Circuit held that the “debtor has a continuing duty to maintain the status quo of exempt property during the pendency of the bankruptcy case.”
If the debtor fails to maintain the exempt status of the property, Judge Harmon said that the trustee is entitled to administer the property that had been claimed exempt.
Should there be an appeal to the Fifth Circuit, the debtors might focus on the different definitions of property of the estate in chapter 7 compared with chapter 13. Since property of a chapter 13 estate includes after-acquired property, an argument could be made that Frost should not apply to IRAs in chapter 7 where after-acquired property does not belong to the estate.
That argument was made to Judge Harmon, but it did not gain much traction.