Language in Divorce Order Did Not Deprive Debtor of Right to Exemption

Posted by NCBRC - June 28, 2022

The debtor’s interest in her ex-husband’s retirement account was exemptible in her bankruptcy even though the funds had not yet transferred and the Judgment of Dissolution order stated that the funds were to be used to pay off the debtor’s credit card debt. In re Steinke, No. 21-90618 (Bankr. C.D. Ill. June 15, 2022).

The debtor was going through a divorce when she filed for chapter 7 bankruptcy. The Judgment of Dissolution order provided: “The Respondent shall receive $75,000.00 from the Petitioner’s Lake County Plasters and Cement Mason Retirement Savings Plan to pay off her credit card debt. This shall be accomplished by way of a Qualified Domestic Relations Order.” At the time of the debtor’s bankruptcy petition filing, the Judgment of Dissolution was a final order, but the QDRO had not yet been filed and the funds not yet transferred.

In her bankruptcy petition, the debtor listed the retirement account in an unknown amount and claimed an exemption of $0.00. The trustee objected and the bankruptcy court permitted the debtor to amend the exemption to claim $75,000 as exempt retirement funds under Illinois law. The trustee renewed his objection.

The court applied the “snapshot” rule to determine the debtor’s interests at the time of her petition with reference to state law. Illinois exemption law provides: “A debtor’s interest in or right, whether vested or not, to the assets held in or to receive pensions, annuities, benefits, distributions, refunds of contributions, or other payments under a retirement plan is exempt from judgment, attachment, execution, distress for rent, and seizure for the satisfaction of debts[.]”

The court found that the Judgment of Dissolution established the debtor’s right to the funds and fixed her interest in the retirement account without regard to the fact that the QDRO had not yet been filed. In so holding, the court rejected the trustee’s contention that the debtor merely had a “claim for equitable distribution” that was insufficient to convey an exemptible interest. The court found rather that even if the Judgment of Dissolution order did not convey current ownership interest, the state exemption law encompassed the right to future distributions.

The court also rejected the trustee’s argument that the debtor and her ex-husband’s expectation that she would use the retirement account to pay off her credit card debt was enforceable by the trustee. The court found that, under Law v. Siegel, 571 U.S. 415, 423 (2014), it lacked authority “to grant or withhold exemptions based on whatever considerations [it] deem[s] appropriate.” Moreover, Illinois exemption law does not condition the exemption on the debtor’s expected use of the retirement funds.

The court further found that the Judgment of Dissolution contained mandatory language with respect to the transfer of the funds, but that the language relating to the expected use of the funds was not mandatory. The court found that the divorce settlement could not be used to enhance the rights of creditors who would not otherwise be entitled to the retirement funds through bankruptcy.

The court denied the trustee’s objection.

Steinke Bankr CD Ill June 2022


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