It has always been a matter of complication when determining if inherited IRA accounts can be affected by Chapter 7 bankruptcy. Recently, the Supreme Court ruled that inherited IRA accounts are eligible to be confiscated for the purpose of discharging debts. A recent case involving a Chapter 7 bankruptcy resulted in the ruling, which could affect Florida bankruptcies from now on.
The hearing originated from a dispute over an inherited IRA account from 2001. A woman received this fund from her mother upon her death. She filed for bankruptcy 11 years later and argued that this IRA account should be protected from her creditors. During the bankruptcy process, certain assets will be liquidated. A court-appointed trustee will oversee the money from these assets being distributed among creditors, thus pulling an individual out of debt.
Inherited IRA accounts are different from regular (retirement) IRA accounts and there are several regulations that determine when and how money can be withdrawn from these funds. These accounts are left to the specified beneficiary, as designed when the account is opened. If a person opens an IRA and deposits money for retirement savings, that particular type of fund would be eligible for protection during the bankruptcy process.
For years the ambiguity surrounding inherited IRA accounts has caused confusion for those filing for Chapter 7 bankruptcy. This new and recent ruling clarifies an issue that could pose a potential complication. Those seeking bankruptcy protection have likely faced emotional and financial struggles. Therefore, it is beneficial to understand all of the implications of filing for bankruptcy. This could be applicable to those in Florida who are also facing overwhelming debt.
Source: Forbes, “Supreme Court Finds Inherited IRAs Not Protected In Bankruptcy“, Deborah L. Jacobs, June 12, 2014