Nebraska Bankruptcy Judge Thomas Saladino has issued a written opinion protecting funds held in an Individual Retirement Account (IRA).  Creditor First National Bank of Wahoo objected to Troy Euse’s claim of an exemption protecting $163,000 held in his IRA account and another $240,000 in a 401(k) retirement account, case number 10-43179.

The debtor claimed that the retirement accounts were exempt under Nebraska Statute 25-1563.01 and under the federal exemption of 11 U.S.C. 522(b)(C).  First National claimed that Nebraska opted out of the federal exemption statute and that only the Nebraska exemption statute applied to IRA accounts.

Nebraska Statute 25-1563.01 exempts “[t]o the extent reasonably necessary for the support of the debtor and any dependent of the debtor, an interest held under a stock bonus, pension, profit-sharing, or similar plan or contract payable on account of illness, disability, death, age, or length of service. . . ”   The bank argued that the IRA account was not “reasonably necessary” for the support of the debtor given the existence of the 401(k) plan, the age of the debtor, and future earnings capacity of the debtor.

The Bankruptcy Court ruled that even though Nebraska did opt out of the federal exemption scheme, the federal exemption of 522(b)(3)(C) was still available to Nebraska debtors.  The Court stated that that any retirement fund that is exempt from taxation under the Internal Revenue Code is also protected from creditors under Bankruptcy Code Section 522(b)(3)(C).  Thus, IRA accounts are exempt under the federal and Nebraska exemption statutes.

This ruling effectively eliminates arguments made by creditors about whether all or a portion of an IRA account is reasonably necessary for the support of a debtor since the federal exemption does not depend on whether the amount of the retirement is reasonable or not.  All that is requiried is that the retirement account not be subject to federal taxation.

In addition, the Nebraska retirement exemption did not apply in situations where a retirement account was established or was amended to increase contributions within two (2) years of filing bankruptcy.  Chapter 7 Trustees have routinely questioned debtors about whether they increased their retirement contribution percentages within the two years prior to filing bankruptcy.  However, the Court’s opinion in the Troy Euse case seems to put those questions to rest, as long as the contributions were made to a tax exempt account.

The Euse decision marks a clear victory for debtors worried about protecting their retirement accounts in bankruptcy.