Is your Retirement Plan Exempt from Creditors in Bankruptcy?

Usually, I wouldn’t reference a case from Chicago because we practice here in New England, which is the First Circuit in the Federal Court system.  What a Court, even a Federal Court decides outside of the First Circuit does not typically hold the weight of Precedence.  However, Chicago’s 7th Circuit is well-respected and I think this case is worth mentioning.  So if you are going to file Bankruptcy and have retirement savings, be sure that your Bankruptcy lawyer properly analyzes retirement funds to ensure compliance with the IRC and the Bankruptcy Code.

Gordon Green filed for Chapter 7 bankruptcy on May 11, 2021, listing his “Sun Life: Life Income Fund,” a Canadian Registered Retirement Savings Plan, as an asset. Green sought to exempt the fund under Illinois statute 735 ILCS 5/12-1006, which exempts assets intended in good faith to qualify as a retirement plan under applicable provisions of the Internal Revenue Code (IRC). The bankruptcy trustee objected, arguing that the fund, organized under Canadian law, did not qualify for the exemption. The bankruptcy court agreed, holding that a retirement plan must be organized under IRC § 401(a), which requires the trust to be created or organized in the United States.

Green appealed to the United States District Court for the Northern District of Illinois. The district court rejected the bankruptcy court’s country-of-origin requirement but still found that the Sun Life Fund was not a tax-qualified retirement plan under the IRC. Consequently, the district court affirmed the denial of the exemption.

The United States Court of Appeals for the Seventh Circuit reviewed the case de novo. The court examined whether the Sun Life Fund qualified as a retirement plan under applicable provisions of the IRC. The court noted that the IRC does not specifically define “retirement plan” for this purpose and that Illinois law requires the plan to qualify under applicable IRC provisions. The court found that the Sun Life Fund did not meet the criteria for tax-qualified retirement plans under the IRC, as it was not governed by any specific IRC provision that regulates retirement plans. The court affirmed the district court’s decision, holding that the Sun Life Fund was not exempt under Illinois statute 735 ILCS 5/12-1006.