IRA Withdrawals Are Not “Income” in Bankruptcy
By Wendell Sherk, Missouri Attorney on Aug 29, 2008 in Bankruptcy Cases & Legislation, Means Testing, Missouri
Withdrawals from retirement accounts do not count as “income” for the bankruptcy means test, according to the Eighth Circuit Bankruptcy Appellate Panel.
At long last, there is again harmony. As I have discussed before, my neighboring courts in the Western District of Missouri had concluded that withdrawals from retirement accounts, like a 401(k) or an IRA, would count towards the current monthly income in the means test. Fortunately for my clients, the courts in the other half of Missouri have not followed this reasoning.
Now the appellate court has finally had the opportunity to overrule this position. The case has a long history — first making news earlier this year when the Court of Appeals concluded a Chapter 13 debtor could object to their own plan in order to allow appellate review of a Chapter 13 confirmation issue.
The BAP has now held that such withdrawals, although potentially taxed as income by the Internal Revenue Service, are not “income” to the debtor when taken because they are in fact simply the liquidation of an existing asset. In effect, it is no different than a withdrawal from a bank account — taking money from one pocket and moving it to the other. The “income” event was when the money first became available to the individual from wages or the tooth fairy. But once the consumer directed it to be deposited into a retirement plan, the debtor did not lose the asset, but merely gained a possible tax advantage (as well as safe-keeping from creditors, typically).
The BAP also pointed out that the result is more in line with the purpose of the means test: To identify consumers who do in fact have regular income sufficient to make a meaningful repayment of unsecured debt. Unless the consumer has a bottom-less pit of retirement funds, it is unreasonable to expect that withdrawals could or would continue for a full five-year period to assist in performing a repayment plan. Of course many of us believe the means test is already an exercise in futility that glorifies form over substance but the Zahn court has made a heroic effort at providing some reason to that process.
Zahn v. Fink (06-6072, August 14, 2008).
Sorry, comments for this entry are closed at this time.