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What Are Retirement Funds in California bankruptcy? Chilton v. Moser Discusses this Exemption to Chapter 7

Blogs from March, 2012

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A person can spend their entire life planning for their future‚ and then lose everything when they are confronted with bankruptcy. That is why their are certain things that can be exempt from your bankruptcy. Our Woodland Hills bankruptcy attorneys concentrate on this area of law so that we can get our clients the relief they deserve.

The United States Code (“U.S.C.” or “Code”) addresses the different exemptions allowed in Woodland Hills bankruptcy proceedings. This Code is created by legislatures who understand the importance of planning for the future. Therefore‚ in this code which controls bankruptcy proceedings‚ in addition to basically every other federal law‚ there is an exemption for individual retirement account’s (“IRAs”).

Chilton‚ et al. v. Moser is a case that arose because of a Chapter 7 bankruptcy proceeding. The main issue in this case is whether an inherited IRA can be exempt from a bankruptcy estate. Originally‚ the bankruptcy court held that an inherited IRA is not exempt from a chapter 7 bankruptcy. However‚ on appeal the district court held that an inherited IRA is exempt from the bankruptcy estate. And upon a second appeal‚ this Circuit Court agreed with the district court.

Upon the filing of Chapter 7 bankruptcy‚ the debtor’s assets are combined and liquidated to become part of the bankruptcy estate. At this point‚ the debtor has the option of withholding a certain amount in assets upon approval of the bankruptcy court. There is a court appointed trustee responsible for the estate and the distribution of these funds to identifiable creditors.

In this case‚ Debtor’s inherited an IRA worth $170‚000. After receipt of this inheritance‚ debtors then filed for bankruptcy and listed the IRA as an asset to be exempt from the bankruptcy consistent with 11 U.S.C. §522(d)(12). 11 U.S.C. §522(d)(12) provides for debtors to exempt certain retirement funds that exempt from taxation consistent with the specified provisions in the Internal Revenue Code.

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The trustee of their Chapter 7 bankruptcy objected to this claim of exemption‚ stating that an inherited IRA is not considered as “retirement funds” under the applicable statute.

This Court explained that under this exemption‚ the debtor must prove two things. Plaintiff must show the amount debtor seeks to have exempt from the bankruptcy proceeding and that the money is in an account exempt from taxation. Thus at issue is whether the plaintiff satisfied these two requirements to withhold the inherited IRA from their Chapter 7 bankruptcy.

It is important to observe case law that discusses this issue. The court in this decision point to cases where it has been held that “retirement funds” within the statute is not limited to the retirement funds of the debtor. Basically‚ “retirement funds” are thought to mean any money “set apart.” Furthermore‚ when these funds are transferred‚ there status as “retirement funds” does not change.

When analyzing the second question regarding where the funds are‚ the court discusses what types of accounts satisfy as those being exempt from taxation. The court here reasons that upon the transfer of the IRA to the debtor’s‚ the funds in this inherited IRA were not taxable. Additionally‚ earnings from assets held in an IRA are not taxable. This court stresses the need for appropriate investigation of the meanings of statutory terms. Because the Internal Revenue Code includes inherited IRAs in their definition “individual retirement accounts‚” this court applied the law in this way.

Because the plaintiff satisfied the two requirements of the statute‚ the court held that this inherited IRA is exempt from the bankruptcy proceedings.

If you are considering filing for bankruptcy‚ contact California bankruptcy attorneys at Cal West Law‚ APLC to schedule your free consultation. Call (818) 446-1334.

Additional Resources:

Chilton‚ et al. v. Moser‚ No. 11-40377 (5th Cir. Mar. 12‚ 2012).

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