The Fifth Circuit resolved a split among the bankruptcy judges in Texas by holding that assets in an individual retirement account, or IRA, lose their exempt status if funds are withdrawn after filing a chapter 7 petition but not reinvested within 60 days as required by Texas law.
The opinion appears to mean that Texas debtors (and perhaps also debtors elsewhere) cannot take money from an IRA until after the chapter 7 case is closed. It also means that a chapter 7 debtor in Texas cannot sell an exempt homestead after filing because it will lose the exemption if the proceeds are not reinvested in a new homestead within six months.
Even after the chapter 7 case is closed, debtors may be exposed if a trustee reopens the case. It is therefore unclear how long debtors must hold exempt property after a chapter 7 case is closed.
The case involved a couple who had about $130,000 in an IRA. In their schedules, they declared the IRA exempt under Texas law. No one objected to the exemption within the prescribed time, and the trustee issued a no asset report.
Later, a creditor learned that the debtors had taken all of the funds from their IRA after filing and had not reinvested the funds in another IRA. The trustee sought turnover of the $130,000. The debtors argued that the exemption was fixed on the filing date. Bankruptcy Judge Jeff Bohm of Houston sided with the trustee and ordered turnover.
The district court upheld Judge Bohm, and so did the Court of Appeals in a July 19 opinion by Circuit Judge Edward C. Prado.
The primary authority was In re Frost, 744 F.3d 384 (5th Cir. 2014), where the Fifth Circuit held that the proceeds of a homestead sale are not exempt if the debtor sells the homestead after filing but does not reinvest the proceeds in another homestead within six months. Although the Frost opinion did not specify the chapter in which the debtor had filed, it was a chapter 13 case.
The debtors contended that Frost should only apply in chapter 13 cases and that the snapshot rule meant that the IRA proceeds were exempt because they were exempt on the filing date.
Judge Prado disagreed, basing his opinion largely on his understanding of Texas law. When the debtors withdrew the funds, the asset changed from an unconditionally exempt asset to a conditionally exempt asset. When they failed to reinvest the funds in another IRA within 60 days as required by Texas law, “the conditional exemption expired, and the [debtors] lost their right to withhold the funds from the estate.”
Judge Prado said that Frost was not distinguishable because that opinion did not limit its effect to chapter 13 and “did not even mention that the case was brought under chapter 13.” He said that the Texas statute on exemptions is “applicable throughout the entirety of the case,” thus suggesting but not clearly saying that the debtors might have been able to withdraw funds from the IRA after the case was closed.
Judge Prado rejected the notion that Section 1306(a)(1) requires a different result in chapter 7. That section takes after-acquired property into a chapter 13 estate, but that principle does not obtain in chapter 7.
Dismissing the distinction, Judge Prado said that the debtor had not acquired “new property within the meaning of Section 1306(a)(1).” He said their “existing interest simply changed from an unconditionally exempted interest in the funds held in the IRA to a conditionally exempted interest.”
To read ABI’s discussion of a Texas bankruptcy court case called Montemayor that reached the opposite conclusion, click here.