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Courts divided on creditor reach over retirement accounts

When individuals decide to file for bankruptcy, they may face a myriad of emotions as a result. Though bankruptcy can be a frustrating process and the prospect of a temporary credit score dip can be scary, filers also often find relief in knowing that certain assets are almost always protected during the process and will remain intact. Unfortunately, interpretation of bankruptcy law can vary from jurisdiction to jurisdiction. This inconsistency can make it difficult for bankruptcy filers to know just what to expect from the process.

For example, there is currently a split in opinion among several federal circuit courts concerning just how far creditors may go in collecting debts. Generally, certain assets are protected in the bankruptcy process including some federal benefits and personal property that has significant emotional value. Certain courts also protect retirement accounts, however others do not.

Most recently, the 7th U.S. Circuit Court of Appeals held that a particular woman's inheritance is not property protected from her bankruptcy creditors under the law. This is a particularly frustrating ruling for potential filers, given that the woman's inheritance resulted from her late mother's retirement account. Given that some courts protect these accounts and others do not, filers will now face a "luck of the draw" scenario when attempting to protect certain retirement-related benefits from the reach of creditors.

Bankruptcy law aims to treat like-situations similarly, but the process is not always so straightforward. If you are considering bankruptcy and are concerned about which assets you will be able to retain ownership of, please consult an experienced local attorney who can advise you of your options.

Source: Thomson Reuters, "In circuit split, court says inherited IRA fair game in bankruptcy," Nick Brown, Apr. 24, 2013

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