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North Carolina Rules IRAS Exempt From Creditors


Considering bankruptcy, but worried about a creditor’s ability to take your retirement holdings, especially those withdrawn early? Well, there’s good news now on the books: a recent North Carolina ruling strengthens the state’s exemption status for retirement funds like IRAs, further protecting them from creditor claims, including those in bankruptcy.

In November, the North Carolina Supreme Court issued its opinion in the case of Kinlaw v. Harris. In this particular case, Kinlaw had obtained a judgment against debtor Harris for nearly $600,000.  The judgment creditor Kinlaw sought that Harris would pay this judgment from Harris’ considerable retirement assets including two Individual Retirement Accounts (IRAs) received from an equitable distribution agreement with his former spouse.

Kinlaw argued that because Harris had taken two distributions from his IRAs over the past four years, Harris had therefore “changed the nature of the IRAs such that they are no longer exempt accounts.” Harris, of course, argued to maintain the exempt status.

In its ruling, the trial court ordered that Harris’ IRA accounts were exempt from execution; but for any future withdrawals from the accounts, Harris must notify Kinlaw as well as hold such funds in an escrow arrangement until a court could determine whether the accounts would remain exempt.

On appeal to the North Carolina Supreme Court, the Court found that funds in an IRA account like Harris’s are exempt from creditor claims under the state’s current exemption scheme.  Further, the Court held that withdrawals from IRA accounts for which the penalty for early withdrawal is paid are also exempt; however the Court acknowledged that multiple withdrawals from an IRA could invalidate the exempt status.  Under these facts, in which Harris has taken only two withdrawals over four years time, the Court held however that this was not  enough withdrawals as to invalidate the exempt status of the IRA accounts.

On the other hand, the North Carolina Supreme Court concurred with the trial court’s assessment that in ordering an escrow type arrangement in order to get a judicial determination of whether any funds withdrawn from the IRA remained exempt.  Essentially, the Court found that the lower court did not abuse its discretion because both parties agreed to this escrow arrangement while in court.

As you might expect, this ruling has implications for parties considering bankruptcy. Since our bankruptcy courts base their exemptions on North Carolina law, Kinlaw provides strong precedent that funds held in an IRA account or withdrawn from an IRA account are exempt from creditor claims.  As such, a bankruptcy trustee may not look to multiple withdrawals prior to a bankruptcy filing to invalidate the exemption status of the IRA funds.

In these tough financial times, it seems many people are withdrawing from their personal retirement accounts and IRAS just to stay current and stave off creditors seeking to take their most precious assets. The case of Kinlaw provides an important reaffirmation that debtors should avoid withdrawing from their retirement funds and instead seek the protections of bankruptcy—protections that now include exemptions for IRAs they might otherwise drain to pay off creditors. Consider bankruptcy BEFORE you touch your retirement account.

If you are facing these types of financial difficulties, knowing a qualified bankruptcy attorney can also help you to conquer your creditors and face your financial fears, yielding the right kinds of support, information and insights—at a low cost— for a viable and secure future. The bankruptcy experts at the Law Offices of John T. Orcutt offer a totally FREE debt consultation and now, more than ever, it’s time to take them up on their offer. Just call toll free to +1-919-646-2654, or during the off hours, you can make your own appointment right online at Simply click on the yellow “FREE Consultation Now” button.

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