In the 34 years I have been practicing bankruptcy law in Massachusetts, we have been informing clients that their Individual Retirement Accounts (IRAs) are generally exempt from creditors in bankruptcy.  As are 401ks, Keogh plans, and so forth.  You simply declare on your Petition and Schedules what your retirement accounts are, provide documentation as to the balances, and the bankruptcy trustee considers them exempt from your creditors.

What is an IRA?

An IRA (or 401k or 403b) is a pretax investment account for retirement that is self-funded and directed.  That is, you put the money in (self-funded), you invest the monies how you wish, and you take the monies out during retirement.  It’s a tax deferral system that is what we, as a nation, have moved to.  The monies that you deposit come from your income and reduce your taxable income in the year deposited; however, they are taxed when you withdraw them.  There are many types of IRAs and tax deferred plans, many ways of investing, and important tax laws to follow for both depositing and withdrawing.

What is important here, is that the tax deferral accounts are considered exempt from most creditors in bankruptcy and are a useful tool in bankruptcy planning.

Eleventh Circuit Says Bankruptcy Debtor Cannot Exempt IRA

However, in an Eleventh Circuit (Alabama, Georgia and Florida) case, the Appeals Court held that a bankruptcy debtor’s IRA was NOT exempt from his creditors.  See Yerian v. Webber, (11th CIR., June 26, 2019).  In that Florida case, Chapter 7 debtor Keith Yerian used an IRA holding company called IRA Services Trust Company that allow for atypical IRA custodian holdings – such as Fidelity, Schwab, or your bank.  Usually folks’ own stocks, bonds, money market accounts, or mutual funds of the above.  We don’t know anything about that company; however, it allows for “things” to be owned by the IRA such as cars and houses.  While the law may allow this, it’s not usual.  In the Yerian case, he apparently owned cars for himself and his wife, and a condo in Puerto Rico.  He paid over $100,000 in tax penalties for improper transactions regarding these holdings.

In Bankruptcy Court he argued that notwithstanding the IRS penalty, he was still entitled to the Bankruptcy Exemption because it was a different law.  The Court agreed that it is a different law, however, the Bankruptcy Court found that Yerian violated the rules of the IRA itself.  The Court held that Yerian violated the IRA rules of maintaining “in accordance with its own [IRA documented] instrument”.  Thus, the self-dealing (buying cars and condos and not mutual funds) violated the IRA Services Company’s rules, or “instrument” and thus was not except.  He set up the IRA properly, however, he did not operate or “maintain” the IRA properly.  Therefore, the Bankruptcy Trustee could seize the asset and use it to pay creditors.

This is a unique case and one of first impression, we understand.

Massachusetts IRA Exemption Exceptions

When you file for bankruptcy protection in Massachusetts, you can use the federal or state exemptions.

In Massachusetts, there are a few exceptions to exempting IRA:  Under Massachusetts General Laws, Chapter 235, Section 34A, divorce, separate maintenance (alimony), child support, restitution for crimes and “sums deposited in a [IRA or annuity etc.] plan in excess of 7% of the total income of the individual within five years of the individual’s declaration of bankruptcy or entry of judgment.”

Burns and Jain Have Experience in Bankruptcy Law

Before filing for bankruptcy protection, you should undergo pre bankruptcy planning.  While the Eleventh Circuit caselaw is not necessarily applicable here, it could be persuasive if similar actions were taken by a debtor.  You should hire an attorney who has experience; an attorney who asks the right questions; an attorney who will prepare your petition and schedules carefully; an attorney who will check the shenanigans of such an IRA before allowing you to file for bankruptcy protection.

Call Burns & Jain at 617-227-7423 for a free consultation.