The 8th Circuit Court of Appeals has affirmed a Bankruptcy Appellate Panel’s opinion regarding whether a retirement account awarded to a spouse in a divorce case is exempt in a bankruptcy proceeding.
Last year the BAP court ruled that a retirement account awarded in a divorce case was not earned by the debtor and was therefore not protected in a bankruptcy case under federal exemption laws. (See Lerbakken decision 2019). This opinion came as a shock to many since funds in a retirement account are traditionally protected.
The BAP court explained that although funds earned and saved in the debtor’s retirement accounts are protected, retirement funds awarded to an ex-spouse are not earned by that debtor and are therefore unprotected under federal exemption laws. (State exemption laws, however, may extend such protection.)
Although the 8th Circuit has now affirmed the BAP’s Lerbakken opinion, it appears that the 8th Circuit is being careful to narrowly limit the scope of that opinion.
The 8th Circuit Court underscored the fact the debtor had failed to transfer the retirement accounts into his own seperate account prior to filing bankruptcy. The BAP opinion mentioned this fact but did not emphasize it. So, had the funds been fully transferred to his own account, would the funds be protected? The 8th Circuit seems to suggest that.
Secondly, the 8th Circuit Appeals Court pointed out that true retirement accounts are not subject to creditor claims but the Lerbakken account was subject to a lien for unpaid attorney fees. So, if the funds were not subject to a lien of a current creditor, would they have been protected as an exempt retirement account? That fact seemed to make a difference to the appeals court.
Lerbakken’s interest in the IRA was a sum of money in his ex-wife’s IRA, not an account “set aside for the day when an individual stops working.”
First, it appears that had Lerbakken delayed filing his bankruptcy until after the retirement accounts were transferred to his own separate account, the funds might have been protected under federal exemption laws.
Second, had Lerbakken satisfied the claim of his divorce attorney prior to filing bankruptcy, the court may have viewed the accounts as retirement savings.
Nebraska Exemption Laws May Protect Retirement Accounts Awarded in a Divorce
The Lerbakken case was filed in Minnesota where the debtor was using federal bankruptcy exemption laws. However, Nebraska has opted out of the federal exemption scheme and uses a different exemption law to protect retirement accounts.
Nebraska Statute 25-1563.01 protects retirement accounts in bankruptcy cases, but what about accounts awarded to a debtor in divorce? Are those accounts protected?
In an unpublished opinion the Nebraska bankruptcy court did rule that a retirement account awarded to a debtor pursuant to a divorce decree was exempt under Nebraska statute 25-1563.01. (See In re Reohrs, Case No. 18-41831).
Until there is a written opinion issued in Nebraska, debtors should be careful about filing chapter 7 cases if they own substantial retirement funds received in a divorce case.
Image courtesy of Flickr and Michael.