Court Finds Retirement Assets Divided in Divorce Not Protected in Bankruptcy

The 8th U.S. Circuit Bankruptcy Court of Appeals has affirmed a lower bankruptcy court’s ruling that retirement assets obtained in a divorce settlement are not exempt from creditors because they are not considered retirement funds as defined by a U.S. Supreme Court decision.

During a couple’s divorce proceedings, a property settlement awarded the ex-husband half of the ex-wife’s 401(k) balance and the entire amount in her individual retirement account (IRA). A court order directed counsel to submit a qualified domestic relations order (QDRO), but his was not done, and the ex-husband has undertaken no other action to obtain possession of the assets. The ex-husband has filed for Chapter 7 bankruptcy protection.

In its brief opinion, the Appellate Court noted that the relevant statutory definition of retirement funds states, “Retirement funds to the extent that those funds are in a fund or account that is exempt from taxation under section 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code of 1986.” The ex-husband contended that the assets awarded to him satisfy this statutory definition because the assets are not taxable to his ex-wife and this inures to his benefit.

The 8th Circuit cited the U.S. Supreme Court decision in Clark v. Rameker in which it addressed the definition of retirement funds. The Supreme Court decision states, “The Bankruptcy Code does not define ‘retirement funds,’ so we give the term its ordinary meaning. The ordinary meaning of ‘funds’ is a ‘sum of money set aside for a specific purpose.’ And ‘retirement’ means ‘withdrawal from one’s occupation, business, or office.’ Section 522(b)(3)(C)’s reference to ‘retirement funds’ is therefore properly understood to mean sums of money set aside for the day an individual stops working.”

The ex-husband argued that the 401(k) and IRA represent marital property that his ex-wife saved for their joint retirement and that he intends to use the assets for his retirement. However, the Appellate Court found this subjective and said it is not required to consider these arguments.

“Any interest he holds in the accounts resulted from nothing more than a property settlement. Applying the reasoning of Clark, the 401(k) and IRA accounts are not retirement funds which qualify as exempt under federal law,” the Appellate Court concluded.