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Supreme Court says inherited IRA is not exempt bankruptcy asset

Consumer bankruptcy is a useful tool afforded to Americans by federal statute that can significantly help those who have found themselves burdened by an unmanageable load of debt due to any number of unpredictable life situations.

Losing a job, unexpected sickness and the subsequent medical bills, as well as the struggling economy are only a few of the factors that have in recent years brought thousands of people to the courts asking for a fresh start.

A fresh start is exactly what bankruptcy is meant to be. Therefore, the long-held exemption that makes retirement accounts inaccessible to creditors in a bankruptcy case makes perfect sense. However, that exemption has contained some ambiguity over the years regarding what does and does not qualify as a retirement account.

The U.S. Supreme Court recently cleared up some of that ambiguity when it ruled that IRAs created and contributed to by the individual debtor are exempt from creditor attachment, but inherited IRAs are not exempt.

In the unanimous opinion, Justice Sonia Sotomayor noted that inherited IRAs have many different characteristics than individual IRAs. For instance, the beneficiary of an inherited IRA cannot continue to add money into the account and must begin to make withdrawals within a prescribed amount of time.

The case in question occurred when the beneficiary of her mother's $450,000 IRA filed for bankruptcy. Creditors claimed that the law allows them to have access to those funds, and the debtor claimed that it does not.

The matter went through several court decisions and appeals before finally being heard by the highest court in the land. The U.S. Supreme Court was very clear that inherited IRAs are not considered retirement accounts under the bankruptcy code.

This may not be good news for Ohio debtors in that it closes an exemption previously available to them. But at least it resolves an ambiguity so that debtors in this particular situation now know what to expect.

Source: Forbes, “Supreme Court finds inherited IRAs not protected in bankruptcy,” Deborah L. Jacobs, June 12, 2014

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