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Supreme Court to decide treatment of inherited IRA in bankruptcy

A case argued before the U.S. Supreme Court recently could drastically change the way retirement funds are handled in bankruptcy court. Currently, certain retirement funds such as IRAs are protected under the U.S. Bankruptcy Code and that same protection is extended to inherited IRAs. However, that could change depending on the court’s decision.

A woman and her husband closed the doors of their struggling restaurant in 2009 and ultimately filed for Chapter 7 bankruptcy in 2010.  At the time of filing, the woman possessed close to $300,000 held in a beneficiary IRA inherited from her mother who passed away in 2001. 

The couple claimed exemption of the IRA as allowed by the Bankruptcy Code.  However, the bankruptcy trustee for their case claimed that funds held in an IRA that is passed on to a non-spouse beneficiary can no longer be considered retirement funds and are therefore not protected in bankruptcy.  It is now in the hands of the Supreme Court justices to decide which side is correct.

Attorneys for the bankruptcy trustee in this case argued that the properties of the IRA fundamentally changed when they were passed on to the daughter from her mother and therefore are no longer retirement funds and should be used to repay the couples’ creditors. 

With more than 45 million U.S. households maintaining some form of a retirement fund, New Jersey residents and those around the country will be keeping a close eye on the decision in this case.

The goal of bankruptcy is to not only discharge the debt but to also come out of it with enough assets to start over. Congress’ intent with allowing exemptions such as retirement funds may have been to do just that.

The Bankruptcy Code allows debtors to keep retirement funds held in certain accounts such as IRAs as well as a list of other personal property that will help them get a fresh start and maintain the security of retirement assets.

Sorting through the complex proceedings of bankruptcy can be challenging so it is advisable to have a knowledgeable legal team assisting you should you pursue bankruptcy.

Source: blogs.wsj.com, “U.S. Supreme Court Hears Bankruptcy Fight Over Inherited IRA Money,” Katy Stech, March 25, 2014

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