When debtors file bankruptcy, they feel safe that their IRA and other retirement accounts are protected from creditors seizing their assets. However, that “hands-off” rule is based on specific circumstances. Different types of creditors have different levels of protections based on governing law, including federal bankruptcy law and state-specific collection laws.

All of those factors came together in a recent case heard in a Texas Fifth Circuit court regarding IRA rollovers. Debtors had filed for Chapter 7 bankruptcy. One of the exemptions they claimed was their IRA, a seemingly routine step countless others have taken.

However, the exempt status was in question due to the debtors’ actions. They had withdrawn money to pay their expenses without rolling over the funds into another retirement account. Seemingly, they were not aware of Texas statutes governing retirement accounts mandate that assets held in an IRA are not used to satisfy debts.

The bankruptcy court ruled that the funds became non-exempt when the rollover did not occur within 60 days. After an appeal to the district court failed, they brought their case before the Fifth Circuit. The basis of their argument revolved around Texas’ “snapshot rule,” which states that all bankruptcy exemptions are fixed at the time of the petition filing and do not lose their exempt status after that date.

In their ruling, the Fifth Circuit found that the IRA funds changed from money in a retirement account to a “conditionally exempted” amount distributed from the retirement account. When the debtors failed to deposit money into another retirement account within 60 days, the funds were no longer exempted from creditors.

The appellate court affirmed the lower court decision that the debtors lost their right to withhold money from the estate.

IRA exemptions are not universal. Certain facts and governing law, particularly in Texas, can put retirement funds at risk. Careful, proactive planning prior to a bankruptcy filing can prevent avoidable collateral consequences.