Current Bankruptcy Implications for Inherited IRAs

Should you be thinking differently about filing for Chapter 7 bankruptcy if you recently inherited an individual retirement account (IRA)? According to a recent article in The Detroit News, inheriting an IRA can actually make a big difference in terms of your personal finances and what you can gain by filing for consumer bankruptcy. Based on the U.S. Supreme Court’s ruling in Clark v. Rameker, inherited IRAs are not associated with the same protections as IRAs that were not inherited. Although the case was decided in 2014, the article emphasizes the need for debtors to revisit the decision and its remaining implications for personal bankruptcy cases.
How Inherited IRAs Can Affect Your Bankruptcy Filing
Why should an IRA impact your personal bankruptcy filing? After all, debtors are entitled to a number of exemptions that allow them to keep certain property even after filing for liquidation bankruptcy. IRAs and 401(k) accounts are exempt up to a certain cap. The federal Bankruptcy Abuse Prevention and Consumer Protection Act (2005) makes clear that IRAs and 401(k) accounts are protected up to a certain amount in the event that you file for Chapter 7 bankruptcy protection. When the law was initially passed, the money in these account was exempt (or not eligible to be used to repay creditors) up to $1 million. Since April 2014, that exempt figure has risen to around $1.2 million to take into account the increase in costs of living.
If your IRA is exempt up to a million dollars, why should you think twice about bankruptcy? As the article explains, “federal courts for years have been divided over whether or not inherited IRAS are entitled to the same protection under the act.” Generally speaking, the reason behind exempting a certain amount of money held in IRAs and 401(k) accounts is that those are “retirement funds” that should not be subject to liquidation. Since the U.S. Supreme Court’s decision in Clark v. Rameker, inherited IRAs are not considered to be “retirement funds.” As such, inheriting an IRA can drastically change a debtor’s situation.
What Happens if You Inherit an IRA and File for Bankruptcy?
Given that inherited IRAs are not “retirement funds” under 11 U.S.C. §522(b)(3)(c), what happens if you inherit an IRA worth, for example, $100,000? To better understand the implications of Clark v. Rameker in current bankruptcy cases, we should follow the example to its conclusion. In addition to inheriting an IRA worth a little over $100,000, let us imagine that you are in debt by $110,000. You might think that filing for Chapter 7 bankruptcy can allow you to wipe out your debt and get a fresh start while retaining those IRA funds. That is not how a bankruptcy court will see it.
In short, the funds from the inherited IRA will be used to pay off your debts. Once that happens, you will only be left in debt by about $10,000, and as such bankruptcy may not be the smartest decision.
Personal bankruptcy is extremely complicated, and there are numerous factors to consider in determining whether you qualify for and can benefit from bankruptcy protection. If you have questions about filing for bankruptcy, and experienced Oak Park bankruptcy attorney can help. Contact the Emerson Law Firm today to discuss your situation and to learn more about filing for bankruptcy.
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