Funding IRA Prior To Bankruptcy is Not Fraudulent Conversion, Says C...

Within two weeks of filing Chapter 7 bankruptcy these debtors took $12,000 of non-exempt cash from an insurance policy and used the money to fund exempt IRAs. The trustee objected that the infusion of cash into the IRAs on the eve of bankruptcy was a fraudulent conversion of non-exempt assets to exempt assets. It sounds like a clear-cut case of fraudulent conversion. Why would debtor put $12,000 into their IRA just two weeks prior to bankruptcy other than to protect the money from their creditors and the bankruptcy trustee.
Guess what? The bankruptcy court denied the trustee’s objection and held that the IRA investment was not a fraud on creditors. Instead, the court said that what the debtors did fell within the ambit of acceptable pre-bankruptcy exemption planning.
The bankruptcy judge said, citing authority, that the conversion of non-exempt assets to exempt property by itself does not establish a fraudulent conversion unless the trustee presents some other evidence of the debtor’s intent to protection the money from creditors. The IRAs were set up, the court noted, for the proper and ordinary retirement planning. People fund IRAs for reasons other than creditor protection.
The court’s other reason for protecting the debtor’s IRAs in bankruptcy was what the court described as the “principal of ‘too much’”. Most fraudulent transfer and conversion leading to discharge denial involve “large claims of exemption and overtones of overreaching.”
My take on this case is that the court wanted to protect these particular debtors’ retirement fund. These particular debtors were not “bad actors” and the husband was suffering from a serious medical condition. These debtors were not “hogs.” The moved a relatively small amount to their IRAs which served several purposes including tax planning, retirement savings, and bankruptcy exemption

. Based upon this one case, debtors may reposition assets prior to filing bankruptcy as long as the amounts are modest and the planning does not use aggressive and complicated asset exemption tools. In re Thomas 2012 WL 2792348 D. Idaho July 9, 2012

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