Debtor Keeps $690K IRA While Creditors Get Virtually Nothing

By Daniel Gill

A Chapter 13 debtor can keep his $690,000 Individual Retirement Account even though he withdrew funds from it to buy a home and even though his creditors stand to recover only 1 percent of their claims, a Tennessee bankruptcy judge ruled.

Paul Supravat Chaudury’s use of some IRA funds didn’t affect the exempt status of the account since he repaid the money within 60 days, Judge Randal S. Mashburn, of the U.S. Bankruptcy Court for the Middle District of Tennessee, said in a Feb. 1 opinion.

Chaudury withdrew about $330,000 from his IRA to buy a house with his spouse and then took out a $252,000 mortgage from BankTennessee about a week later. He promptly deposited most of the loan proceeds back to the IRA.

In order to retain its exempt status, money rolled over from one qualified retirement to another—or the same—qualified account must be transferred within 60 days.

Three months later, he filed Chapter 7 bankruptcy. He later converted the case to Chapter 13, which requires the debtor to propose a plan that uses future income to repay all or a portion of his debts over a three- to five-year period.

Chaudury listed the IRA on his schedules filed with the Chapter 13 and claimed the entire amount exempt, meaning it wasn’t property of his bankruptcy estate and wouldn’t be required to go toward paying creditors.

If the IRA were property of the estate, Chaudury could pay his creditors 100 percent of their claims, the court said.

Susan R. Limor, the Chapter 13 trustee, objected to the claim of exemption. She also objected to Chaudury’s proposed payment plan and wanted the judge to reconvert the case to a Chapter 7 liquidation.

At the heart of Limor’s objections was her contention that the IRA lost its eligibility as a qualified retirement plan because of Chaudury’s use of the funds and subsequent repayment. She argued that to be considered a rollover, the same money would have to be reinvested in the retirement account.

The court overruled the objections. It found that there was no requirement that the “same money” taken out of the retirement account has to be rolled over within 60 days. Chaudury’s use of the money he borrowed from the bank to repay the IRA within 60 days was sufficient to preserve the account’s exempt status, it said.

The fact that creditors got only 1 percent had no bearing on the exempt status of the IRA. “If it is a qualified plan, then it does not matter how large the IRA account is or how small the distribution to unsecured creditors would be,” it said.

Steven L. Lefkovitz, Nashville, Tenn., represented Chaudury. Susan R. Limor, Nashville, Tenn., appeared on her own behalf.

The case is In re Chaudury , 2018 BL 34776, Bankr. M.D. Tenn., 16-05574, 2/1/18 .

To contact the reporter on this story: Daniel Gill in Washington at dgill@bloomberglaw.com

To contact the editor responsible for this story: Jay Horowitz at jhorowitz@bloomberglaw.com

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