IRA Withdrawals Create Regular Income for 109(e) Purposes

Posted by NCBRC - December 30, 2022

The debtor had “income” for purposes of eligibility to be a chapter 13 debtor where he intended to use regular withdrawals from his IRA to fund his plan. In re Frysinger, No. 20-31202 (Bankr. D. Ore. Dec. 21, 2022).

The debtor created a plan which he proposed to fund through: 1) holdings in bank account consisting of funds he received pre-petition from settlement of a personal injury lawsuit, 2) future sales of property, and 3) IRA withdrawals. The case came before the court on a creditor’s challenge to the debtor’s status as a bankruptcy debtor under section 109(e).

Section 109(e) provides that only a debtor with “regular income” may be a debtor under chapter 13. Section 101(30) defines the term ‘individual with regular income’ to mean an “individual whose income is sufficiently stable and regular to enable such individual to make payments under a plan under chapter 13 of this title, other than a stockbroker or a commodity broker.”

“Income,” however, is not defined in the Code. Therefore, the court looked to the Webster’s and Oxford dictionary meanings of the word and found the essence of the term to be “revenue accruing on account of an asset or performance of a service over time.” The court also looked to how other courts have dealt with income. Specifically, the court noted that a recent case from a Ninth Circuit bankruptcy appellate panel, Richards v. Marschak (In re Richards), No. 8:21-BK-10635-ES, 2022 WL 884593 (9th Cir. BAP Mar. 24, 2022), found that the debtor was not eligible for chapter 13 bankruptcy where her proposed income consisted of future sales of property, potential lawsuit recovery, and intent to foreclose on a support judgment.

The court here began with the debtor’s proposed use of his bank account holdings observing that, at the time he filed his petition, the debtor had already collected the entire settlement amount that funded the account. For that reason, the court found the account was an asset rather than income.

As to his future property sales, the court noted that the $200/month the debtor scheduled as income under this category was not listed as “business” sales but was presumably based on anticipated sales of exempt property. Agreeing with the panel in Richards, the court found those sales did not establish the debtor’s eligibility to be a bankruptcy debtor.

Finally, the court looked to the debtor’s proposed use of IRA withdrawals to fund his plan. The court noted that the panel in Zahn v. Fink (In re Zahn), 391 B.R. 840, 845 (8th Cir. BAP 2008), held that withdrawals from an IRA were equivalent to withdrawals from a savings account and were therefore not income for purposes of calculating current monthly income.

The court noted, however, that income may have different interpretations depending on the bankruptcy context. For that reason, the court looked to the nature and purpose of IRAs. The court was guided in part by the Supreme Court’s finding in Rousey v. Jacoway, 544 U.S. 320, 330-31, 125 S. Ct. 1561, 1568-70 (2005), that IRA withdrawals “provide a substitute for wages (by wages, for present purposes, we mean compensation earned as hourly or salary income), and are not mere savings accounts.”

In this case, the court observed that the debtor was over 60, unemployed, and able to take IRA withdrawals without tax penalty. The court found that his plan to use his IRA as income was sufficient to meet the requirements of section 109(e) for bankruptcy eligibility.

Frysinger Bankr Ore Dec. 2022


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