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Are IRAs exempt from creditors in bankruptcy?

Here's a hypothetical to consider. Imagine that, for various reasons, you are forced to file for Chapter 7 bankruptcy. You have worked hard your entire life and always tried to put aside something for retirement. Through persistent diligence and effort, you have managed to accrue some savings in an individual retirement account (IRA). Now the creditors are knocking and actively seeking to drain those savings.

Can they?

Not in most cases, as the Bankruptcy Code specifically cites IRAs and provides an exemption for them. Because the money you have worked so hard for and have envisioned providing a major assist during your retirement and elder years is so important, though, it is key that the services of an experienced bankruptcy attorney be enlisted wherever retirement assets feature in bankruptcy.

That can be especially important when the source of the funds is at issue. In other words, what if the retirement assets were not procured through your own labor, but, rather, were inherited from a relative?

That singular difference from the norm seems to have thrown federal courts into disarray, as evidenced by a ruling issued just last week by the 7th U.S. Circuit Court of Appeals.

That court took a case that was originally presided over by a bankruptcy court, which held that creditors could have legal access to an inherited IRA. A federal district court reversed that ruling on appeal, but the circuit court reinstated it on the ground that inherited funds do not deserve the same protection as that generally accorded IRAs under bankruptcy law.

That decision strays from outcomes in other appellate circuits. Appeals panels in both the 5th and 8th circuits, for example, have ruled that set-aside retirement funds are flatly exempt from creditors.

Again, any questions or concerns regarding retirement money or any other held assets in the context of bankruptcy should be discussed with a proven debt relief attorney.

 

Source: Thomson Reuters News & Insight, "In circuit split, court says inherited IRA fair game in bankruptcy," Nick Brown, April 24, 2013

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