U.S. Supreme Court to Rule on Bankruptcy Protection for Inherited IRAs

Bankruptcy ProtectionThe U.S. Supreme Court has granted certiorari of In re Clark, 714 F.3d 559 (7th Circuit 2013), and thus will apparently resolve a split among federal Circuit Courts of Appeals regarding whether a debtor’s inherited IRA is exempt from bankruptcy. Specifically, the issue is whether an inherited IRA qualifies as “retirement funds” under 11 U.S.C. § 522(b)(3)(C). In In re Clark, the Seventh Circuit held that an IRA inherited by the debtors from the debtor-wife’s mother did not qualify for a bankruptcy exemption, because such assets were not the retirement funds of the debtor, but the retirement funds of a deceased person. According to the Seventh Circuit, an IRA constitutes “retirement funds” only if it is held for the owner’s retirement, but the debtors in Clark were not retired and were presently using the funds for their own benefit. In contrast, the Fifth and Eighth Circuits have previously held that an inherited IRA qualifies for bankruptcy protection because the funds were someone’s retirement funds at an earlier time. Chilton v. Moser, 674 F.3d 486 (5th Cir. 2012); Doeling v. Nessa, 426 B.R. 312 (8th Cir. 2010).

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