According to the Associated Press, the Supreme Court ruled earlier this month that inherited Individual Retirement Accounts are not shielded from creditors in bankruptcy proceedings.
The news service reported that the decision would clear up confusion about unspent IRAs that parents leave to their children during bankruptcy cases. Bankruptcy laws currently protect most personal retirement assets from the reach of creditors. However, there was controversy about what courts should do when it comes to inherited accounts, which can be withdrawn from without having to wait for someone to retire.
The AP reported that Supreme Court Justice Sonia Sotomayor said that crucial change in the status of the cases makes it less like retirement savings and more like money available to pay off creditors. Sotomayor argued that if the accounts were protected, someone might be able to use inherited IRA funds “on a vacation home or a sports car immediately after [his or] her bankruptcy proceedings are complete.”
The Supreme Court took up the case of a Wisconsin couple, Heidi Heffron-Clark and Brandon Clark, who declared bankruptcy but wanted to prevent creditors from going after a $300,000 IRA that Heffron-Clark inherited when her mother died, according to the AP.
The attorneys representing the couple argued that an inherited IRA is still technically a retirement fund because that is the way they are originally set up. Initially, the couple failed to convince a federal judge that creditors should not be allowed to seek the funds, but a federal district court ruled on behalf of the couple during an appeal. The case then went before the Supreme Court, which returned its ruling.
Will I Lose My Retirement Funds in a Bankruptcy?
Keep in mind, this ruling only affects inherited IRAs—it does not affect individual retirement accounts, which are often shielded from collectors during bankruptcy. In 2005, Congress overhauled bankruptcy laws, leaving most retirement plans exempt from creditors, although there are a few exceptions, which you should talk to an experienced bankruptcy attorney about.
If you are underwater financially and want to protect your retirement funds, do not fret. You may be eligible for Chapter 7 bankruptcy, which allows a person to discharge unsecured debt like credit card debt or medical bills, which often go unpaid when financial issues arise.
Additionally, if you do not qualify for a Chapter 7 bankruptcy, you may be eligible for a Chapter 13 bankruptcy, which allows a person to repay debts based upon income. This type of bankruptcy is thought of as the “wage-earner’s” plan, because one of the requirements for an individual filing is a steady income.
If you have questions about your retirement funds and creditors, contact our Washington DC and Maryland bankruptcy lawyer now for a free consultation.
Law Firm of Kevin D. Judd
Judd’s Judgment: Child support payments are considered a non-dischargeable debt during bankruptcy.