Retirement accounts not protected by bankruptcy exemption

July 11, 2014 2:07 pm Published by

In a surprising decision, the U.S. Supreme Court has decided that inherited individual retirement accounts are not to be protected by bankruptcy under federal law. That will have plenty of consequences, since it used to be a bankruptcy exemption that couldn’t be claimed by creditors. Individual retirement accounts used are protected, because in 2005, President Bush signed a law called the Bankruptcy Abuse Prevention and Consumer Protection Act that provided retirement funds protection during bankruptcy.

The problem has come about with inherited IRAs, though. Because people aren’t using those inherited IRAs as retirement funds, they are seen as a different kind of fund and are not protected under the bankruptcy protections previously offered. That is an issue that needs to be considered by those with IRAs and those who may be looking to inherit money.

This new ruling has come as a result of a 2010 case that took place when a woman filed for Chapter 7 bankruptcy. She listed the IRA as an exempt asset, but there was a problem. Some people argued that the $300,000 asset should be used to satisfy her creditors. The woman appealed a ruling by the Wisconsin bankruptcy court that the IRA wasn’t protected, heading to the federal district court. That court reversed the initial court’s opinion.

The bankruptcy trustee later appealed the second court’s ruling, leading to a change that put the woman back where she started; her IRA wasn’t going to be protected. Finally, the decision had to be made by the Supreme Court, and the court ruled that it shouldn’t be protected in this kind of a situation.

If you’re wondering about filing for bankruptcy in New York, this situation is one that you may face. Speaking with someone about your legal options before heading to court is a good choice that may leave you with more knowledge about your options.

Source: Market Watch, “Inherited IRAs lose bankruptcy protection“, June 13, 2014

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