Pension plan payments in bank not exempt from seizure/trustee?

[TedAZ]

Hello to all, this is my first post. Hubby and I ran up a lot of credit card bills in 2019 and 2020 (about $150K now with interest and fees). Our income is Social Security, two pensions (ERISA and exempt in AZ), a annuity (exempt in AZ BK law) and I have a federal annuity. All of this is exempt income, each going into non-comingled account. We are looking at a Chapter 7 and fit under the median income.

I was reading in the forum that once Hubby's exempt pension plans and annuity are deposited that they are no longer exempt! Please tell me that im reading this wrong! And if they are not exempt, would getting paper checks protect the funds provided that we cash it and live on them?

Thanks,
Ted

[justbroke]

Welcome to BKForum.

I can't speak to Arizona law, but generally, pension funds must be in a protected account in order to enjoy the exemption. If you were to withdraw all your money from an ERISA-protected account and transfer it into a regular Demand Deposit Account (DDA) -- which is a checking or savings account -- then you lose the protection.

Maybe despritfreya can comment specifically on Arizona.

[BKTexBCS]

Welcome to BKForum.

I can't speak to Arizona law, but generally, pension funds must be in a protected account in order to enjoy the exemption. If you were to withdraw all your money from an ERISA-protected account and transfer it into a regular Demand Deposit Account (DDA) -- which is a checking or savings account -- then you lose the protection.

Maybe despritfreya can comment specifically on Arizona.

Makes complete sense. For example, in Texas your payroll check is protected until you deposit it in your bank acct.

[despritfreya]

See:

In re Sutton–Robinson, 472 B.R. 77 (Bankr. Ariz. 2012)

The general rule states that the deposit of statutorily exempt funds into a bank account does not affect a debtor's exemption nor does it change the exempt character of the funds, so long as the source of the exempt funds is reasonably traceable. If it is impossible to separate out exempt from nonexempt funds, then an exemption cannot lie(dealing with social security benefits).

However, as Sutton alludes to, tracing is not the end of the analysis. You have to look at the actual statute that sets up the exemption, Sutton dealt with a mistaken transfer of funds from an IRA brokerage account to a regular brokerage account. The mistake was done by the brokerage firm. Funds were returned to the IRA account after the Chapter 7 was filed. Judge Marlar (now retired), found that the funds never lost their IRA status because the mistake was fixed and the debtor was not subject to taxation for an impermissible withdrawal. “Generally, any amount paid or distributed out of an IRA is includable in the person's gross income, and thus loses its exempt status. I.R.C. § 408(d)(1). Sutton-Robinson at 85

You will need to sit down with a qualified attorney to determine if the money in the bank account is protected. Tracing is not the only issue. The issue is going to be whether or not the funds lost their exempt status once they hit your hands (IRA withdrawn funds not protected once taxable - just money sitting in a bank account). In the context of SS and VA benefits, the proceeds are protected so long as they are traceable. This does not mean that all proceeds from all retirement/disability/annuity plans are protected.

My clients have protected segregated funds from SS, VA, and private disability plans. I seem to recall that Federal pension payments have the same protection as SS and VA but I would have to spend time searching for the provision - time which I don’t have now. I highly doubt segregated payments from a private employer’s ERISA qualified plan fall into any protection.

Des.