Can You Lose Your IRA in a Bankruptcy?

A Chapter 7 bankruptcy involves a trade-off: you wipe out qualifying unsecured debts and any property you have gets sold to partially pay your creditors. Florida, like other states, allow debtor to exempt certain property, including an Individual Retirement Account (IRA), so you don’t lose everything.

However, a recent court case shows that a debtor can even lose their IRA if they engage in prohibited activities. It hopefully is a wake-up call that investors need to be careful that they don’t violate the rules or else they could make certain assets vulnerable.

Self-Directed IRA

The IRA at issue was a self-directed IRA. These investment vehicles allow for alternative investments, such as investing in real estate, companies, intellectual property, and precious metals. In the typical IRA, a person invests in stocks and bonds, but a self-directed IRA provides more options.

Keith Yerian took full advantage of the flexibility of a self-directed IRA when he:

• Bought a condo in Puerto Rico with his IRA funds and then vacationed there
• Titled certain assets in his own name even though they were owned by the IRA
• Let his wife use a vehicle that was titled in the name of the IRA

These types of self-dealing transactions were prohibited by the IRA’s governing documents. In all, Yerian incurred more than $100,000 in tax penalties for abusing his IRA. When he filed for bankruptcy, the trustee objected to his attempt to claim his IRA as exempt, even though the law allows IRAs that are set up properly to be withheld from the trustee.

Judges Agree with the Trustee

The case worked its way up to the Eleventh Circuit Court of Appeals, which issued an opinion agreeing with the trustee that Yerian’s IRA was not exempt. The Court essentially found that because Yerian had not maintained the IRA according to its governing instrument, that it was not exempt. Specifically, the governing instrument had prohibited illegal transactions, but he had engaged in them by buying the condo and using the vehicles for personal use.

Practical Implications

Most people do not have a self-directed IRA. Instead, your IRA will be managed by someone, who will operate the IRA according to the governing instrument. For this reason, you have little to fear from the recent decision from the Eleventh Circuit. Your IRA should be exempt from creditors if you file for Chapter 7 bankruptcy.

However, if you have a self-directed IRA, you must carefully make sure that you adhere to the governing document. If it prohibits a certain transaction, then engaging in it will make your entire IRA vulnerable to creditor claims in a bankruptcy proceeding.

Contact a Plantation Bankruptcy Firm Today

Determining which assets are exempt in a Chapter 7 bankruptcy is always complex, but it is a necessary step before deciding to go ahead and file your bankruptcy petition. At Nowack & Olson, our Plantation Chapter 7 bankruptcy attorneys work with clients to determine whether a Chapter 7 or another bankruptcy is right for them.

To find out more, please contact us by calling 888-813-4737.

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