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.
The court pointed out that a bankruptcy court may reach an independent decision regarding the qualification of a debtor’s IRA when the IRS had not considered the debtors abuse of plan assets or audited the IRA’s operations. A debtor may forfeit his IRA exemption if he uses IRA funds in violation of IRA rules. If it looks like duck and is called a duck it is not a duck if it does not quack. Relax debtors- I have never seen a bankruptcy trustee investigate how a debtor managed his self-directed IRA. The case is 2010 WL 1408343.
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Tags: Exemption
Posted June 18, 2011 by Brayden Laura under Credit Report