Will I lose my Inherited IRA in a Bankruptcy Case Given The Recent US Supreme Court Ruling?
Yes, if the amount of your inherited IRA is greater than any applicable exemptions in a chapter 7 Bankruptcy. However, depending on your financial circumstances, Chapter 13 may afford you protection.
Will I lose my Inherited IRA in A Chapter 7 Bankruptcy?Possibly, on June 12, 2014, the US Supreme Court ruled in the case of Clerk v. Rameker that IRAs inherited by someone other than a spouse cannot be considered retirement funds and protected from creditors as typical IRAs are. Unlike typical retirement funds, a person who inherits such "inherited IRA" can withdraw the funds at any time without having to first await his or her own retirement. Justice Sonia Sotomayor wrote for the majority of the Court and recognized that "nothing about the inherited ARA's 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." Accordingly, the debtors in the Clerk case will not be able to shield their inherited IRA which is worth around $300,000 from their creditors who are owned approximately $700,000. The chapter 7 trustee will be able to distribute the funds to the creditors
What does this Mean for You?If you have an IRA that exceeds any applicable exemption to which you may be entitled and file a chapter 7 bankruptcy, you will have to turn over the IRA funds to the chapter Trustee for distribution to creditors. So for instance, in New York, a chapter 7 debtor can elect to use the Federal Exemptions afforded under the Bankruptcy Code. If such debtor does not own a home, the debtor may be entitled to protect up to $12,725 in non-exempt assets, which is known as the "wild card exemption." However, if such person is not entitled to such exemption or if the IRA exceeds the $12,725, then such individual will have to turn over the excess amount to the trustee as such amount is not protected.
Can a Chapter 13 Bankruptcy Filing Help Me Save My Inherited IRA?Yes; it can provide more protection than in chapter 7 if you have the funds to pay the non-exempt portion over time or if someone is willing to assist you in paying those funds over time. A chapter 13 is a payment plan which is based upon your disposable income as well as your non-exempt assets. Monthly payments are made by debtors to the chapter 13 who then distributes them to creditors. For instance, if you have an inherited IRA worth $32,725 and no other non-exempt assets, and are able to avail yourself of the wild card exemption, then (depending on your income) you may be able to propose a plan that allows you to pay the $20,000 portion of the inherited IRA over a 5 year period, together with the Trustee's commission of 10%. This would be equal to $367 per month over 60 months. At the end of the five (5) year period, you would be afforded a discharge of all dischargeable debts. So, for instance, even if you had $100,000 in debts and only paid $22,000 under the plan, you would receive a DISCHARGE of ALL OF YOUR DEBTS upon completion of your plan payments. Further, during the five year (5) period, no creditor could take actions to collect from you (including garnish your wages and levy on your bank accounts) as there is an automatic stay. Not only does chapter 13 serve to protect assets from being liquidated by a chapter 7 trustee, but it is also allows individuals whose income exceed the thresholds of chapter 7 to be able to file for bankruptcy. Please contact Barbie D. Lieber, Esq. of Lieber & Lieber, LLP at 60 East 42nd Street, New York, New York 10165 at 212-949-5586 or [email protected] if you would like to learn more about Chapters 13 and 7, as well as how Chapter 13 can be used to protect your interest in an inherited IRA.