Update on IRAs and Personal Bankruptcy Exemptions

When it comes to filing for bankruptcy, most Americans have been operating under the assumption that they'll be able to exempt retirement funds when they file for a Chapter 7 bankruptcy.  In other words, retirement savings accounts, such as those contained in individual retirement accounts (IRAs), typically can be exempted under federal law when someone files for consumer bankruptcy.  However, the recent U.S. Supreme Court ruling in Clark v. Rameker emphasizes that some exceptions exist when it comes to this rule.
Supreme Court Ruling: Inherited IRAs Aren't Retirement Funds
We previously discussed the potential implications of Clark v. Rameker when the case was still pending before the Supreme Court.  As a quick reminder, the case involves Heidi Heffron-Clark's inherited $450,000 traditional IRA.  Heidi inherited the IRA from her mother, Ruth, who named her daughter as the sole beneficiary.  When Heidi and her husband later decided to file for personal bankruptcy, they wanted the funds from the IRA to be exempt.
But on July 12, the Court ruled unanimously that inherited IRAs do not qualify as retirement funds such that they're exempt during a bankruptcy proceeding.
The Court didn't address whether traditional and Roth IRAs are exempt.  Rather, the holding relates strictly to IRAs that have been inherited.  In other words, the decision only applies to inherited retirement accounts.  
Justice Sonia Sotomayor wrote the unanimous decision, emphasizing that inherited IRA accounts do not qualify as retirement funds, and as such, they're not exempt during bankruptcy.  According to the decision, "the text and purpose of the Bankruptcy Code make clear that funds held in inherited IRAs are not 'retirement funds' within the meaning of the bankruptcy exemption."  
What was the Court's reasoning?  In short, inherited IRAs don't allow heirs to add money to the account.  So in other words, an heir can't fully use an IRA as if it were her own.  She can only take money from the account--she can't invest more money into the account for her own retirement.  Additionally, an heir can only make specific types of withdrawals and at certain times, which is also different from the way an original owner of an IRA can use the account.
Effects on Future Personal Bankruptcy Proceedings
According to an article in Insurance News Net, the decision "has turned the estate planning committee on its head."  Indeed, one retirement and financial planning specialist asserted that the Court's decision is "sending seismic shock waves through the estate planning community."  What's the big deal?
One financial analyst suggested that the decision will "make it easier for creditors and bankruptcy attorneys to lay claim on inherited retirement assets."  According to Eleanor Blayney, a consumer advocate with the Board of Certified Financial Planners, the Court's decision "points to a significant chunk of American wealth that is now, quite clearly, no longer as 'bulletproof' from creditors as most thought."
As of last years, IRAs across the country contained about $6.5 trillion in total, and Blayney estimates that about $54 billion of those assets may no longer be protected.  
Dealing with exemptions during consumer bankruptcy can be complicated, but an experienced Oak Park bankruptcy lawyer can help with your case.  Contact the Emerson Law Firm today to learn more about how we can help consumers with debts and personal bankruptcy.
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