Understand the complexities and nuances of the Bankruptcy Code to better advise clients and prepare for court.
By Diane Davis
Chapter 7 debtors who transferred their exempt IRA funds after filing bankruptcy didn’t lose their exemption in the funds, the U.S. Bankruptcy Court for the Northern District of Iowa held ( In re Chambers , 2017 BL 298334, Bankr. N.D. Iowa, No. 16-00552, 8/24/17 ).
The funds were “technically” property of the bankruptcy estate when Jason and Courtney Chambers transferred them to a third party, Judge Thad J. Collins wrote Aug. 24.
But there was no harm to the bankruptcy estate by the transfer, the court said. Thus, retroactive authorization of the transfer is appropriate, the court said.
The Chamberses received a $29,964 personal injury award following a motorcycle accident. They deposited $13,000 into Roth IRAs and used the rest for living expenses.
One month later, they filed Chapter 7. Later the same day, the Chambers withdrew the funds and used them as a down payment on a house.
The Chamberses claimed $13,000 in IRAs exempt in their bankruptcy.
The trustee objected, arguing that because the debtors transferred the property, there isn’t anything to return to them as exempt.
The Chamberses contend the exemptions are determined as of the petition filing date and the transfer was harmless to the estate. They asked the court to retroactively authorize the transfer.
It is commonplace for debtors to use exempt property before it reverts to them as exempt, the court said. Because the property was going to revert to the Chambers anyway, this use is harmless, the court said.
Section 522(g) prevents a debtor from exempting property in which the debtor made a pre-petition transfer that the trustee later avoids. That provision doesn’t apply in this case because the trustee hasn’t recovered the property, the court said.
The trustee filed an adversary case to recover the money, but that separate case is stayed pending this court’s ruling on the exemption issue first, the court said. If the trustee’s avoidance action had been decided first, Section 522(g) might bar the debtors from exempting the property, the court said.
Derek N.W. Hong, Cedar Rapids, Iowa, represented the Chamberses; Jared F. Knight and Eric W. Lam, of Simmons Perrine Moyer, Cedar Rapids, Iowa, represented Trustee Sheryl Schnittjer.
To contact the reporter on this story: Diane Davis in Washington at DDavis@bna.com
To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com
Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.
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