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Appeals courts define IRA bankruptcy exemptions differently

Some people would say that standardized laws regarding bankruptcy exemptions and other rules would be helpful and make the bankruptcy process easier for Florida residents as well as people across the country. If someone moves to another state where bankruptcy law is different, it can cause confusion and even remove the option for people who would benefit from bankruptcy relief. Even judges within the circuit courts can interpret the laws differently.

Recently an appeals court said that inherited IRA accounts weren’t exempt in bankruptcy. According to a decision of three federal appeals judges, a woman who had inherited $300,000 from her late mother’s IRA won’t be able protect the funds from creditors. The woman and her husband had disputed the IRA’s bankruptcy exemption with the trustee in charge of administering her bankruptcy estate.

The issue is a matter that has received differing opinions in the past. In 2011, a judge in Wisconsin said creditors could seek IRA funds to pay debts, but a district court later reversed the judge’s decision. Bankruptcy laws exempt retirement funds from being claimed by creditors, but some courts maintain that IRAs are no longer retirement funds when they’re passed on to a new owner when the original owner has died.

Judges in the 5th and 8th Circuits disagree, saying IRAs should continue to be considered as retirement funds, even when they’ve been inherited by new owners. The 5th Circuit ruled in 2012 that an asset set apart for retirement at any time should be exempt from creditors.

A lawyer for the case involving the $300,000 IRA says it may go to the U.S. Supreme Court. Because future decisions can make a big difference for people filing for bankruptcy, it will be interesting to see the outcome of a Supreme Court decision.

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

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