Fate of inherited IRAs in bankruptcy ripe for Supreme Court?

One of the critical issues that come into play in any filing for bankruptcy is the question of what assets may be considered fully protected from action. In other words, what is subject to exemption from being forfeited to liquidation or to creditors.

In Texas, laws are considered to be generally favorable to those who are in need of debt relief. Exemptions under state law are considered liberal and if exemptions allowed under the federal code are better, the filer can opt to apply them instead. Knowing what options exist and which might be best in any individual’s particular circumstance really requires the help of an experienced bankruptcy attorney.

Of course, there is also the reality that the law can be fluid, which means it can change and that just reinforces the need for working with an attorney.

One recent decision by the 7th U.S. Circuit Court of Appeals in Chicago appears to have added a possible dose of fluidity into the legal landscape. In a decision late last month, the court declared that an individual retirement account inherited by a woman from her mother is not exempt from attachment by creditors in bankruptcy. The IRA is worth $300,000.

The decision by that court runs counter to decisions that have come from both the 8th and 5th Circuits. That latter court is the one that covers Texas. Judges in those jurisdictions have held that IRAs are exempt retirement funds and don’t lose that status, even if they change hands.

Because of the split in the lower courts over the issue, many legal observers believe the question could be headed for the U.S. Supreme Court for further determination. It all depends on whether the case out of the 7th Circuit is appealed and the attorney for the woman involved hasn’t commented on that.

Source: Thomson Reuters, “In circuit split, court says inherited IRA fair game in bankruptcy,” Nick Brown, April 24, 2013

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