IRA Withdrawals counted as income?

[MBeach222]

I know they cannot touch my IRA as an asset, but when the trustee calculates my income, do they include or exclude withdrawals I made from my IRA to pay bills, expenses?

I am under 55 and these count as "early distributions." My biz stinks, and I have to tap into my IRA from time to time to pay medical insurance, HOA, living expenses, etc.

To clarify, I'm asking if IRA withdrawals count in me being below the mean income for my state.

Thanks

[AngelinaCatHub]

Once taken out, your IRA funds do not fall into protection and the money becomes an asset. Also you are taxed pretty well with a ten percent penalty. Very expensive. Now in FL the "head of household" has a protected right to $500 a week. This cannot be levied but I do believe your self distributed IRA funds will have to be counted on your forms as income. Are you represented? If so, you are paying your lawyer good money for the best answers relating to you. 'Hub

[AngelinaCatHub]

(2)

(a) All of the disposable earnings of a head of family whose disposable earnings are less than or equal to $ 500 a week are exempt from attachment or garnishment.

(b) Disposable earnings of a head of a family, which are greater than $ 500 a week, may not be attached or garnished unless such person has agreed otherwise in writing. In no event shall the amount attached or garnished exceed the amount allowed under the Consumer Credit Protection Act, 15 U.S.C. s. 1673.

(c) Disposable earnings of a person other than a head of family may not be attached or garnished in excess of the amount allowed under the Consumer Credit Protection Act, 15 U.S.C. s. 1673.

http://www.tampa-bankruptcy.com/florida_exemption_statute.html

[MBeach222]

Thanks, again... I very much appreciate the guidance. I know its an asset after withdrawal, but does it count as income towards me making more or less than the State median income, which is a pre-requisite for BK...

I have a question about the Head of Household definition....I am a single guy living alone with no dependants, so am I the head of my own household? Or does that $500 only apply to people who have dependants in the household? I am a household of one. Me.

I retained a BK attorney, but these are questions that I did not think to ask when we met.

Once taken out, your IRA funds do not fall into protection and the money becomes an asset. Also you are taxed pretty well with a ten percent penalty. Very expensive. Now in FL the "head of household" has a protected right to $500 a week. This cannot be levied but I do believe your self distributed IRA funds will have to be counted on your forms as income. Are you represented? If so, you are paying your lawyer good money for the best answers relating to you. 'Hub

[ValleYum]

Hi MBeach222.

Short answer is yes it counts as income. I found this when Googling your question:

Do Large, Irregular IRA Withdrawals Count As Debtor Income In Means Test Calculation?

The definition of income is important in the administration of the "means test" to determine eligibility for Chapter 7 bankruptcy. Some sources of income are specifically excluded from "income" for means test purposes; social security is an example of income received by the debtor but excluded from the means test. Other than money excluded by the bankruptcy law, the means test cast a wide net to capture income available to debtors to pay their expenses and creditors. Almost any regular source of money available to pay household expenses counts as the debtor’s income.

A prospective debtor in my office presented an interesting issue about money to be included or excluded from a means test analysis. This debtor had an IRA which at the beginning of 2008 had a balance of approximately $100,000. During the past year, the debtor withdrew about $50,000 from his IRA to pay bills. The IRA was further reduced by the stock market crash to its present balance of about $20,000. Recognizing that he could not continue to pay bills from IRA withdrawals the debtor decided to file Chapter 7 bankruptcy. If his IRA distributions from the past six months were included the debtor could not pass the means test. The question presented is whether voluntary, large IRA distributions are counted as "income" in this debtor’s means test calculation.

I discussed the question with an attorney in the U.S. Trustee’s Orlando office. The U.S. Trustee is responsible to review bankruptcy petitions for eligibility under the means test rules. The U.S. Trustee explained that IRA distributions are included in the definition of income under the means test. In this case, the debtor will not be able to pass the means test given his large IRA distributions during the six month period used to calculate means test income. However, if the debtor explains on his petition the IRA withdrawals the U.S. Trustee likely would not seek a dismissal of the bankruptcy. The Trustee evaluates IRA income to determine whether substantial abuse is indicated. Where the remaining balance in the IRA suggests that large distributions cannot continue in the future, and where the IRA balance is small relative the debtor’s age and retirement needs, the U.S Trustee will often exercise its discretion to permit the Chapter 7 bankruptcy filing even though IRA or other retirement receipts technically cause the debtor to flunk the means test. It seems as if this U.S Trustee is applying a common sense approach to means testing when the debtor’s retirement income and savings are involved.

http://www.bankruptcyorlando.com/2009/01/do-large-irregular-ira-withdrawals-count-as-debtor-income-in-means-test-calculation.html

Hope the info helps you.

[IamOld]

This is an absolute GEM!!!!

Hi MBeach222.

Short answer is yes it counts as income. I found this when Googling your question:

http://www.bankruptcyorlando.com/2009/01/do-large-irregular-ira-withdrawals-count-as-debtor-income-in-means-test-calculation.html

Hope the info helps you.

[MBeach222]

Thanks, Yum -- this was exactly my question. I appreciate.

Hi MBeach222.

Short answer is yes it counts as income. I found this when Googling your question:





Hope the info helps you.

[msm859]

Actually there is a case that says the opposite and that the early withdrawal is NOT income for calculating the means test. I had this discussion with my attorney and concluded it was not and proceeded forward listing the withdrawal on the schedule about other financial affairs. Trustee never questioned it.

[MSbklawyer]

Actually there is a case that says the opposite and that the early withdrawal is NOT income for calculating the means test. I had this discussion with my attorney and concluded it was not and proceeded forward listing the withdrawal on the schedule about other financial affairs. Trustee never questioned it.

Same here. If they are income, it was income was at the time it was earned, not at the time the withdrawal was made. Never an issue with the trustee over that.

[despritfreya]

This is probably a district specific issue - from the Office of the US Trustee:

STATEMENT OF THE U.S. TRUSTEE PROGRAM’S POSITION ON LEGAL ISSUES ARISING UNDER THE CHAPTER 7 MEANS TEST:

Following is a line-by-line summary of Form 22A and various recurring disposable income issues likely to arise in chapter 7 under the BAPCPA provisions of 11 U.S.C. § 707(b). The summary gives the position of the United States Trustee Program (USTP) on these issues. For ease of reference, the USTP positions are listed in summary fashion without citation to legal authority. The referenced lines are those on the Form 22A. Unless a circuit court has decided an issue to the contrary, United States Trustees should, absent unusual circumstances, maintain these positions when interpreting section 707(b). . .


Line 7, Pension and retirement income. . . includes all other retirement, including government, 401(k), and IRA.

(Emphasis added.)

________________

The above would include early withdrawal from IRA as such is "income" and must be reported on the tax return.

The entire “Position" may be seen at:

http://www.justice.gov/ust/eo/bapcpa/docs/ch7_line_by_line.pdf

Des.

[msm859]

This is probably a district specific issue - from the Office of the US Trustee:

(Emphasis added.)

________________

The above would include early withdrawal from IRA as such is "income" and must be reported on the tax return.

The entire “Position" may be seen at:

http://www.justice.gov/ust/eo/bapcpa/docs/ch7_line_by_line.pdf

Des.

In re Zahn 06-6072 (8th Cir. 8-14-2008) specifically held an IRA distribution should NOT be treated as income for purposes of the means test. The well reasoned case stated a withdrawal from an IRA is no different then a withdrawal from a savings account and does not help in predicting "income".

[despritfreya]

In re Zahn 06-6072 (8th Cir. 8-14-2008) specifically held an IRA distribution should NOT be treated as income for purposes of the means test. . .

Actual cite:

In re Zahn, 391 B.R. 840 (8th Cir. BAP 2008)

I like the reasoning. After quickly researching its application and other similar decisions (including one from a State within my Circuit), I found that virtually all reported decision are in the context of a Chapter 13 (determining the "commitment period"). Although the reasoning clearly applies, I would like to see a reported decision dealing with a Chapter 7. Maybe there is one and I just did not find it.

Des.

[yomann]

I had this same issue prior to filing and had many discussions with my attorney .........
He seeked the advice of other attorneys and concluded it may, or may not, be classified as income !
In the end, he advised delaying filing BK7 until the prior IRA withdrawals fell off the 6 month look back period.