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Bankruptcy trustees can sell IRAs because of debtors' bad faith

New Jersey consumers who are considering or are in the process of filing for bankruptcy may want to take some cues from a North Carolina couple on what not to do. A district court ruled on Sept. 29 that because the debtors acted in bad faith during the filing process, the bankruptcy trustee can sell the husband's $240,000 individual retirement account.

When the couple started having financial trouble, they took funds from the husband's IRA three times between 2009 and 2011 and mortgaged their house twice. The initial mortgage was for $503,965 with Ameritrust Mortgage Company, which both the husband and wife signed. The loan was transferred to Wells Fargo, which never recorded the deed of trust. Subsequently, the debtors obtained a First Bank loan for $40,000, for which a deed of trust was recorded.

Afterward, First Bank started state foreclosure proceedings, and then the couple filed for Chapter 7. They reported that the $428,287 Wells Fargo mortgage was secured and that only the husband had signed, that the $31,977 First Bank loan was unsecured business debt and that only the wife had an individual retirement account. Not knowing that this was inaccurate, the bankruptcy trustee issued a no distribution report and discharged the debts. Later, the trustee realized the errors and requested that the case be reopened.

The court found that the couple falsified their equity report, misreported that only the husband's name was on the Wells Fargo loan and did not report the husband's IRA or the three withdrawals that they made from it. This meant that the trustee spent time and money to disentangle the bad faith. Although it subsequently held that the trustee could not sell the house, the district court decided that the husband's IRA was fair game.

Filing for bankruptcy might be complex and confusing for some people. If this is the case, they could obtain the assistance of bankruptcy attorneys. Legal counsel may also offer them advice on alternatives to bankruptcy.

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