Ch. 7 Debtor Must Turn Over Funds He Withdrew From Exempt IRA

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By Diane Davis

Sept. 6 — A Chapter 7 debtor who withdrew more than $129,000 in exempt retirement funds after no one objected to his claimed exemption must turn over that money to the bankruptcy trustee, a district court in Texas held Aug. 29 ( Hawk v. Engelhart (In re Hawk), 2016 BL 280924, S.D. Tex., No. H-15-914, 8/29/16 ).

Judge Melinda Harmon of the U.S. District Court for the Southern District of Texas concluded, on an issue of first impression, that the Fifth Circuit's holding in Viegelahn v. Frost (In re Frost), 744 F.3d 384 (5th Cir. 2014) (26 BBLR 390, 3/20/14) , requires debtors withdrawing funds from their exempt Individual Retirement Accounts (IRAs) to roll over those funds into another exempt IRA account within 60 days under Texas Property Code 42.0021(c) to retain their exemption from the bankruptcy estate and creditors.

In Frost, because a debtor sold his homestead and did not reinvest the proceeds in another homestead within six months, under Texas law, the proceeds were no longer exempt from the estate, the court said.

The court agreed with the bankruptcy court's reasoning and analogy of this case with Frost, and held that a debtor has a “continuing duty to maintain the status quo of exempt property during the pendency of the bankruptcy case.” Funds that were removed from an exempt IRA account during the pendency of the bankruptcy estate for living expenses automatically became property of the bankruptcy estate once they lost their exempt status under state law when debtor Gregory Hawk failed to meet the state law's 60-day reinvestment requirement, the court said.

Hawk elected to exempt two IRA accounts totaling approximately $164,900 under Texas Property Code Ann. § 42.0021(a), when he filed for Chapter 7 protection. In Chapter 7 bankruptcy, a debtor's nonexempt assets are liquidated by a trustee, and the proceeds are distributed to creditors.

The trustee filed a “no asset” case report and proposed abandoning all assets not claimed as exempt. The debtor then withdrew all of the funds in one IRA account but didn't reinvest or “roll over” any of them into a new exempt IRA account but used the money to pay for living expenses.

The bankruptcy court concluded that because the funds weren't reinvested within 60 days of being withdrawn, they became non-exempt and property of the bankruptcy estate which the trustee was entitled to distribute to creditors.

The district court affirmed the bankruptcy's court's ruling.

William P. Haddock, Houston, represented debtors Gregory D. Hawk, also known as Greg Hawk, and Marcie H. Hawk, also known as Marcie Ruelle Hawk, Marcie H. Hawk; John F. Higgins, IV, and Aaron J. Power, Porter Hedges LLP, Houston, represented appellee Chapter 7 Trustee Eva S. Engelhart.

To contact the reporter on this story: Diane Davis in Washington at

To contact the editor responsible for this story: Jay Horowitz at

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