Can you keep your Roth IRA even if you go bankrupt? In Georgia, yes, says the Eleventh Circuit | Arnall Golden Gregory LLP

In a matter of first impression, the Eleventh Circuit Court of Appeals ruled that a Roth IRA is not owned by a Georgia bankruptcy. Hoffman vs. Signature Bank of Georgia, case no. 20-12823 (11th Cir. January 24, 2022). This means that a trustee in bankruptcy cannot access the Roth IRA for the benefit of creditors. While this creates a possible hurdle for creditors and trustees in bankruptcy attempting to liquidate assets held in retirement accounts, it does not necessarily mean that Individual Retirement Accounts are always barred from administration in a bankruptcy case. individual bankruptcy.

Factual and procedural context in Hoffman vs. Signature Bank of Georgia

In Hoffman, the debtor was a retired Air Force colonel who had personally guaranteed a large SBA loan that his son-in-law used to operate a restaurant. In D Hoffman, 605 BR 560, 563 (Bankr. NDGa. 2019) (Drake, J.). After the business failed, the bank filed a lawsuit against the debtor, the debtor’s son-in-law and daughter. Identifier. Shortly thereafter, the debtor filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code (as did his son-in-law and daughter). Identifier.

On his bankruptcy filing forms, the debtor provided for interest on more than $1.7 million held in various retirement accounts, including a 401(k), a traditional IRA, and two Roth IRAs, and he exempted the total value of these accounts under various subsections of the OCGA. § 44-13-100(a). Identifier.

Following an objection to the exemptions claimed by the debtor in these accounts, the bankruptcy court considered, among other things, the following issues: (a) whether the two Roth IRAs were excluded from the assets of the bankruptcy of the debtor under 11 USC § 541(c)(2); and (b) if they were members of the bankruptcy estate, were exempt under Georgia’s exemption laws. Identifier. at 563-64.

The bankruptcy court found that the Roth IRAs belonged to the bankruptcy estate, but found that they were not exempt under applicable Georgia law because they were not reasonably necessary for the maintenance of the debtor or his wife. Identifier. at 569. This meant that the Chapter 7 trustee could access these Roth IRAs and use them to pay the debtor’s creditors. The debtor admitted that the Roth IRAs were not exempt, but appealed the ruling that they belonged to his estate in district court. The district court declined to rule on what was a matter of first impression. The debtor then appealed to the Court of Appeals for the Eleventh Circuit.

Applicable law

Before discussing the Eleventh Circuit’s decision in Hoffman, it is important to briefly review the applicable law. When a debtor files for bankruptcy, a bankruptcy estate is formed which includes all of the debtor’s legal and equitable interests in the property. 11 USC § 541(a). However, while this sounds broad and inclusive, certain real estate interests are excluded from the bankruptcy estate and therefore a trustee in bankruptcy cannot access these assets for the benefit of creditors. More specifically, with regard to Hoffman, Section 541(c)(2) “excludes from the bankruptcy estate any property of the debtor that is subject to a restriction on transfer enforceable under the “applicable law of non-bankruptcy”. » Patterson vs Shumate, 504 US 753, 755 (1992) (citing 11 USC § 541(c)(2)). For example, in In re Meehan, the Eleventh Circuit held that because Georgia garnishment laws prohibited a judgment creditor from garnishing funds in a traditional IRA (established under 26 U.S.C. § 408), a traditional IRA is not the property from bankruptcy. See In re Meehan, 102 F.3d 1209, 1211-14 (11th Cir. 1997). However, the investigation does not stop there, if a debtor is a natural person and not a legal person. If an asset is owned by the estate, the individual debtor may be able to exempt and effectively remove it from the estate and bankruptcy administration.

What is important for the purposes of the result in Hoffman, the decision in Meehan was issued before Congress authorized Roth IRAs (i.e., it had not yet passed 26 USC § 408A). Also, after Meehan, in 2016, the Georgia Legislature amended the applicable garnishment law to state that “[f]and enjoys a individual retirement account or a pension or retirement program are exempt from the garnishment process until they are paid or otherwise distributed to a member of such program or its beneficiary. OCGA § 18-4-6 (2016) (emphasis added). In short, by this amendment, the legislator removed any specific reference to section 408 or section 408(A) of the tax code. Because of this withdrawal, and because the debtor had admitted that it was unable to exempt the Roth IRAs under applicable Georgia law, the issue on appeal in Hoffman questioned whether a Roth IRA is an “individual retirement account” within the meaning of Georgia’s recently amended garnishment law. The debtor said yes, and the respondent bank argued no.

The outfit in Hoffman

In analyzing whether the debtor or the bank was correct, the Eleventh Circuit first found that, based on previous case law that the earlier version of Georgia’s garnishment statute permitted garnishment of the Roths IRA (the older version of the Georgia Garnishment Act specifically referred to section 408 accounts, but made no mention of section 408A Roth IRA), and the subsequent amendment to OCGA § 18 -4-6 in 2016 in which the Georgia Legislature removed any specific reference to Section 408 or Section 408A accounts, the Georgia Legislature intended to clarify that traditional IRAs and Roth IRAs are exempt from garnishment. Hoffman, Case #20-12823, at *9 of 10. As a result, the Eleventh Circuit ruled that Roth IRAs (like traditional IRAs) are not bankrupt property in Georgia, and voided and returned the case in district court. Identifier. at *10 out of 10.

Key points to remember

Hoffman represents the proposition that a Roth IRA is not owned by a Georgia bankruptcy and therefore cannot be administered for the benefit of creditors. This is obviously good from the debtor’s point of view, but bad from the point of view of creditors and trustees in bankruptcy. Hoffman expands Eleventh Circuit participation in Meehan and creates another obstacle to the collection of a debtor’s individual retirement accounts. Nevertheless, it is important that debtors, creditors and trustees recognize that recoveries are still possible from these accounts in certain circumstances. For example, under 26 USC § 408(e), if a debtor engages in a prohibited transaction (as defined by the IRS), the account ceases to be considered an Individual Retirement Account and becomes therefore subject to administration. In addition, the Supreme Court recently ruled that an inherited IRA is not an individual retirement account within the meaning of applicable exemption law and is therefore subject to the administration of a trustee in bankruptcy. See Clark v. Rameker, 573 US 122 (2014). In a word, despite holding Hoffman, creditors and trustees should consider whether scheduled retirement accounts are, in fact, “individual retirement accounts” within the meaning of applicable law. If they are not, they may still be subject to administration for the benefit of creditors.

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