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How To Lose Exempt Funds In Bankruptcy (Or, How To Protect Them If You Are So Inclined)

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I like to think of myself as a pretty darn modern bankruptcy attorney. I have an IPad. I engage in social media. I blog (though faithful readers will know that I am on track to turn over a pretty hefty portion of my paycheck this year….maybe I don’t blog as much as I think). While I won’t deny that these avenues help me grow my business by engaging potential clients, the primary reason I chose to participate is because I believe strongly in the spread of information.

Ok, you look confused. Because of this belief, I spend a lot of time purusing other bankruptcy blogs. I find they can be a great resource for potential topics and fresh viewpoints. Over the weekend, I was catching up on my bookmarked sites and came across an interesting post by a Florida Bankruptcy Attorney.  I have pasted an exerpt below:

How to mess up a bankruptcy exemption. I happened upon a Florida bankruptcy case decided in 2010 wherein a court held that a debtor’s self-directed IRA was not exempt. The debtor’s had a securities account that clearly was titled as an IRA account. The IRS approved the securities account as a proper self-directed IRA account as to its form. The problem was that our debtor used his IRA money improperly and in violation of IRS rules for self-directed IRAs. The debtor borrowed money from the IRA, pledged his IRA account as security for a loan, and commingled IRA funds with his other money. The debtor’s misuse of the IRA disqualified the IRA under IRS regulations. Even though the IRS had not investigated or independently disqualified the IRA the bankruptcy court held that the money in this debtor’s IRA lost its exemption.  

Yes, I know. This article references a Florida bankruptcy case. And, despite our shared sunshine, I am well aware that we are in Arizona. However, this article touches on an important point that can apply to all bankruptcy cases: just because an asset starts out exempt, doesn’t mean it will end that way. In other words, you must handle you assets purposefully and in accordance with the bankruptcy code if you want to protect their non-exempt status.

Need some convincing? I recently heard about a bankruptcy case in which a debtor was struggling to protect exempt social security funds that had been comingled with non-exempt funds in a single bank account. Another all-to-ccommon speedbump occurs when debtors take funds from their exempt retirement accounts, or from protected home equity for that matter, prior to filing bankruptcy. This change in form can strip an asset of its exempt status. 

What is my advice to you? If you are currently filing or considering filing for bankruptcy protection, please, pleeeaaaase, PUH-LEASE consult with your bankruptcy attorney prior to making and financial decisions. This means that BEFORE you sell your car, pay off a loan, put equity into your home, or deposit your social security checks, give your attorney a ring. He or She will be happy to hear from you.

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