Exemptions

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IRA Funds Garnished Pre-Petition Not Part of Bankruptcy Estate

Where the judicial lien against the debtor was fully satisfied before the debtor filed his bankruptcy petition, the transfer of funds from his IRA used to satisfy the lien was not an avoidable transfer under Section 547 or Section 522(f) or (h). Elliott v. Pacific Western Bank, No. 18-17421 (9th Cir. Aug. 12, 2020).

When the debtor defaulted on a loan held by Pacific Western Bank, PWB obtained a state court judgment against him and instituted a levy against the debtor’s employee retirement plan (IRA). Under California law, the funds in the debtor’s IRA were exempt only to the extent they were necessary for the debtor’s post-retirement support. The state court issued an executory lien against the debtor’s IRA, and PWB garnished the funds to cover the amount owed. Three months later, the debtor filed Chapter 7 bankruptcy. After he received his discharge, he filed an adversary complaint seeking to recover the funds garnished from his IRA under the theory that they were exempt under state law and Section 522(f) of the Bankruptcy Code. PWB argued that the funds were not exempt in the bankruptcy proceeding because the lien had been fully executed before the filing of the bankruptcy and, therefore, they did not become part of the bankruptcy estate. The bankruptcy court agreed. The district court affirmed. [Read more…] about IRA Funds Garnished Pre-Petition Not Part of Bankruptcy Estate

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6th Circuit Clarifies Treatment of 401(k) Contributions in Chapter 13

Rejecting its own dictum in  Seafort v. Burden (In re Seafort), the Sixth Circuit held that a chapter 13 debtor’s post-petition voluntary contributions to an employer-sponsored retirement plan are not part of her disposable income so long as they are a continuation of pre-petition contributions. Davis v. Helbling (In re Davis), No. 19-3117 (6th Cir. June 1, 2020).

Well before she filed for bankruptcy, the debtor began making monthly contributions in the amount of $220.66 to her retirement account. When she filed for bankruptcy, she included those contributions in her schedule of expenses. The trustee objected to confirmation of the debtor’s proposed Chapter 13 plan on the basis that, because of the monthly contributions to her 401(k), she was not proposing to contribute all of her disposable income to the plan. Adhering to dictum in Seafort v. Burden (In re Seafort), 669 F.3d 662, 674 n.7 (6th Cir. 2012), the bankruptcy court sustained the trustee’s objection. The debtor amended her plan to incorporate the 401(k) amount, and the bankruptcy court certified the case for direct appeal to the Sixth Circuit. [Read more…] about 6th Circuit Clarifies Treatment of 401(k) Contributions in Chapter 13

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First-In First-Out Applies to Commingled Account

The Bankruptcy Court correctly used the first-in, first-out approach to determine how much of a commingled account could be attributed to exempt funds. Tydings v. Reed (In re Tydings), No. 20-4057 (W.D. Mo. Sept. 3, 2020).

After her husband died, the Chapter 7 debtor received surviving widow’s social security benefits, which she deposited into her bank account, where she also deposited her weekly paychecks. Before receiving the social security payments, the debtor had $581.27 in her bank account. In the three months prior to her bankruptcy filing, the debtor deposited $15,171.57 in social security funds and $6,670.38 in wages into the account. During that same period, the debtor withdrew $13,461.07 from the account, leaving a balance of $8,939.15 on the petition date. The debtor claimed the entire balance in her account as exempt in bankruptcy. The trustee objected because not all the funds in the account were exempt. The trustee argued that the court should apply a first-in, first-out (FIFO) analysis, which would allow the debtor to exempt $3,981. The bankruptcy court sustained the objection, and the debtor appealed to the district court. [Read more…] about First-In First-Out Applies to Commingled Account

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Texas District’s Treatment of Tax Refund In Chapter 13 Invalidated

Finding that it encroached on a below-median debtor’s substantive rights, the Fifth Circuit invalidated a local form Chapter 13 plan provision that required all debtors to turn over any tax refund in excess of $2,000. Diaz v. Viegelahn, No. 19-50982 (5th Cir. Aug. 26, 2020).

NCBRC filed an amicus brief on behalf of the NACBA membership in support of the debtor in this case. [Read more…] about Texas District’s Treatment of Tax Refund In Chapter 13 Invalidated

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Uncashed Retirement Loan Check Not Exempt

The debtor’s uncashed loan check from her retirement account was property of the estate and was not exempt under Section 522(d)(12). Ostrander v. Brown (In re Brown), No. 19-24 (B.A.P. 1st Cir. May 21, 2020).

Before filing her bankruptcy petition, the debtor received, but did not cash, an $18,000 check representing a loan from her retirement account. The Chapter 7 trustee sought turnover of the check. The bankruptcy court denied the turnover motion, finding that, because the funds were from an exempt retirement account and the debtor had not yet cashed the check, the check was likewise exempt. [Read more…] about Uncashed Retirement Loan Check Not Exempt

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IRS Setoff Supersedes Exemption

The IRS’s right to set off the debtors’ tax overpayment against their pre-existing tax debt superseded the debtors’ right to exempt the anticipated refund. Copley v. U.S.A., No. 18-2347 (4th Cir. May 12, 2020).

When the Copleys filed for Chapter 7 bankruptcy, they listed a debt to the IRS of over $13,500. They also claimed their anticipated tax refund as exempt under Virginia’s exemption for “money and debts due the householder not exceeding $5,000.” They subsequently filed their tax returns, which showed that their withheld income exceeded the amount they owed by over $3,000. Instead of sending the Copleys a refund, however, the IRS notified them that it had used the overpayment to set off the pre-existing tax debt. The debtors filed a complaint in the bankruptcy court seeking an order requiring the IRS to turn over the tax refund to the debtors. The bankruptcy court found that the refund was part of the bankruptcy estate and that the exemption superseded the IRS’s right to set off. The district court affirmed. [Read more…] about IRS Setoff Supersedes Exemption

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Homestead Exemption Reduced when Mortgage Paid with Fraudulently Obtained Funds

The bankruptcy court properly reduced the debtor’s homestead exemption and imposed a constructive trust on the property where the debtor paid off her mortgage using funds from the sale of a vehicle she did not own and to which the creditor had the right of possession. Graybill v. Thomas (In re Bentley), No. 19-14758 (11th Cir. Apr. 22, 2020) (unpublished).

This case involved a 1930 Cord Phaeton automobile. Originally, the car was owned by the debtor’s son, Lynford Bentley. Dr. Susan Kolb lent Lynford $50,000, which loan was secured by the car. Lynford stopped paying on the loan, and then he died. Dr. Kolb sued Lynford’s girlfriend to obtain the car or its value. But Lynford’s mother, and the debtor in this case, Catherine Bentley, took possession of the car and removed it from Georgia to Florida. A Georgia judge issued an order giving Dr. Kolb the right to possession of the car, and Dr. Kolb informed Catherine of that order. Notwithstanding her knowledge of Dr. Kolb’s right to possession of the vehicle, Catherine sold it at auction, clearing $112,947.81. She used the majority of the funds to pay off her mortgage. Dr. Kolb sued Ms. Bentley for fraudulent transfer. Ms. Bentley filed for Chapter 7 bankruptcy and claimed a homestead exemption under Florida law.

Finding that Ms. Bentley never owned the vehicle and therefore had no right to the funds she used to pay off her mortgage, the bankruptcy court sustained the trustee’s objection to the exemption claim, reducing the amount of the exemption by $112,947.81. The bankruptcy court also overruled the debtor’s objection to Dr. Kolb’s claim and imposed a constructive trust on the debtor’s homestead property. On appeal, the district court affirmed. [Read more…] about Homestead Exemption Reduced when Mortgage Paid with Fraudulently Obtained Funds

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IRA and 401(k) Obtained Through Divorce Not Exempt

Incorrectly relying on the decision in Clark v. Rameker, the Eighth Circuit found that the chapter 7 debtor was not entitled to exempt funds in his ex-spouse’s IRA and 401(k), which he obtained through a dissolution agreement but which had not been transferred to his name at the time of his bankruptcy petition. Lerbakken v. Sieloff & Assoc., P.A. (In re Lerbakken), No. 18-3415 (8th Cir. Feb. 7, 2020).

The debtor acquired his ex-wife’s IRA and half of her 401K in a dissolution. When the debtor failed to pay his divorce attorney’s fees, his lawyer obtained an order from the court placing an attorney’s lien on the funds in the IRA and the 401K. The lien exceeded the value of the accounts. Six months later, Mr. Lerbakken filed for Chapter 7 bankruptcy, seeking to exempt the two accounts under section 522(b)(3)(C). At the time of his petition, he had not filed a Qualified Domestic Relations Order (QDRO), nor had the accounts been transferred to his name. Upon objection by the divorce attorney, the court found the two accounts were not “retirement funds” and disallowed the exemption. The BAP affirmed. Lerbakken v. Sieloff & Assoc., P.A. (In re Lerbakken), 590 B.R. 895 (B.A.P. 8th Cir. 2018). [Read more…] about IRA and 401(k) Obtained Through Divorce Not Exempt