Inherited IRA Accounts Are Not Protected From Creditors in Bankruptcy Proceedings, US Supreme Court Says

market-movements-2-1388612-mIn the recent United States Supreme Court Case, Clark v. Rameker, the nine justices of the High Court unanimously held that inherited IRA retirement accounts should not be protected in a bankruptcy proceeding the way other retirement assets are.

The opinion, written by Justice Sonia Sotomayor, took up the case of Clark family, who owned a pizza shop but declared bankruptcy in 2010 shortly after the shop closed down. The main asset the couple had to their name was a roughly $300k Individual Retirement Account that they had inherited from the woman’s mother.

When the couple declared bankruptcy, they hoped to retain the IRA and the assets contained therein. However, the trustee that was in charge of the family’s estate wanted to use the proceeds from the IRA to pay off landlords and creditors.

The couple went through several appeals with varying results until they ended up in front of the 7th Circuit Court of Appeals, which held that the individual retirement account was not subject to protection from creditors. From there, the family appealed the result up to the United States Supreme Court.

The U.S. Supreme Court agreed with the lower court, explaining that the bankruptcy code must strike a balance between allowing creditors to recover what they are owed, but also to protect the debtor’s “essential needs.” Along those lines, the Court determined that an inherited retirement account is not as “essential” as an earned retirement account because there is no regulation on what a person can spend the inherited account on. Specifically, Justice Sotomayor wrote:

Nothing about the inherited IRAs legal characteristics would prevent (or even discourage) the individual from using the entire balance of the account on a vacation home or sports car immediately after her bankruptcy proceedings are complete.

The Court then explained the importance of the decision, noting that there are millions of people with retirement accounts and thousands of them die each day. Thus, the repercussions of the decision are to be widespread.

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If you are considering applying for and filing for bankruptcy, you should speak with an experienced Kentucky Bankruptcy law attorney before you do. Depending on your financial situation, there are many things that an attorney will be able to help you with throughout the process, including the changing landscape of the legal environment. Each year, the bankruptcy laws change ever so slightly (and sometimes not so slightly), and it is an attorneys job to stay on top of all the changes. Don’t risk trying to navigate the system alone; seek the counsel of an experienced attorney. Richard A. Schwartz is a skilled and dedicated Kentucky bankruptcy law attorney who has been helping his clients find financial freedom for years. He understands the United States Bankruptcy Code and knows what it takes to successfully navigate the complex system of bankruptcy courts. Click here, or call 502-485-9200 to speak with Attorney Schwartz about your situation.

More Blog Posts:

Federal Bankruptcy Court Goes over the Differences Between Chapter 7 and Chapter 13 Bankruptcies, Kentucky Bankruptcy Lawyers Blog, published March 31, 2014.

Pizza Chain, Sbarro, Has Its Bankruptcy Plan Approved By Federal Court, Kentucky Bankruptcy Lawyers Blog, published May 28, 2014.

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