Rousey v. Jacoway

Background

Richard and Betty Jo Rousey were former employees who rolled required lump-sum pension distributions into individual retirement accounts (IRAs). They filed a joint Chapter 7 bankruptcy and claimed those IRAs as exempt so they could keep the money. The bankruptcy trustee objected, lower courts sustained the objection, and several federal appeals courts were split on the issue, so the Supreme Court took the case to resolve the disagreement.

Reasoning

The Court asked whether IRAs fit the Bankruptcy Code’s exemption for payments from stock bonus, pension, profit-sharing, annuity, or similar plans, and whether IRA payments are tied to factors like age. The Court noted that IRAs are trusts with nonforfeitable balances, allow tax-deferred growth, permit rollovers, require minimum distributions starting at age 70½, and impose a substantial 10-percent tax penalty on most early withdrawals. Those features make IRA income function as a substitute for wages and link access to age. The Court also pointed to the statute’s references to tax-qualified plans under the Internal Revenue Code, including the section governing IRAs, as further support. The Court therefore concluded IRAs are similar plans and provide a right to payment on account of age.

Real world impact

Because the Court held IRAs can be exempt under the retirement-plan exemption, many people who file bankruptcy may be able to shield IRA balances from creditors, and trustees will face narrower access to those funds. The Supreme Court reversed the Court of Appeals and sent the case back for further proceedings consistent with its ruling.