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Supreme Court rules creditors can reach inherited IRA

Washington, D.C., residents who are seeking to discharge debt in bankruptcy may be interested in a decision that has come down from the Supreme Court. The ruling concerns whether or not inherited retirement funds can be protected from creditors in bankruptcy proceedings.

In 2001, a woman inherited her mother's IRA which was worth $450,000 at the time. Over the years, the woman made monthly withdrawals from the IRA. In 2010, she declared bankruptcy, but still had a total of $300,000 in the inherited IRA. She claimed that this amount should be classified as a retirement fund, which would exempt it from creditors during the bankruptcy proceedings. The bankruptcy court did not agree with her, but she appealed her case to the Supreme Court.

The Court agreed unanimously with the bankruptcy court's decision and found that the IRA was, indeed, reachable by creditors. The Court looked at the reason for exempting retirement accounts in the first place, which is to allow people to save money for retirement after they have stopped working. Here, the inherited IRA was being withdrawn from while the woman was not yet retired. In fact, an inherited IRA requires that the owner make withdrawals. Because of this, the IRA was a retirement account in name only, and could be used to satisfy the woman's creditors.

Sometimes, filing for Chapter 7 bankruptcy is the best way out of overwhelming debt. An attorney may be able to help with the process by examining the person's finances and determining what will be used to pay creditors. The attorney may also be able to help with credit repair after the bankruptcy, in order to help raise the person's credit rating after their financial fresh start.

Source: NPR, "Supreme Court: Inherited IRAs Not Protected From Bankruptcy", Nina Totenberg and Rebecca Buckwalter-Poza, June 12, 2014

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