When a woman and her husband declared personal bankruptcy, they excluded from their list of assets the individual retirement account funds that the woman had inherited from her mother. They reasoned that the bankruptcy code exempts IRAs from the funds that creditors can tap, and this was an IRA.
The bankruptcy court called them out on it. The IRA may have been a retirement account, the court said, but it was not the woman’s or her husband’s retirement account. The tax code treats inherited IRAs differently, so the funds should not be exempt. The district court disagreed, but the 7th U.S. Circuit Court of Appeals (which does not include Maryland) recently decided that the bankruptcy court had been right.
The appellate decision runs counter to precedents in two other circuits, the 5th and 8th. The differences are more than philosophical; the monetary implications for both debtors and creditors in a bankruptcy could be significant. For that reason, commentators believe the case will head to the U.S. Supreme Court soon.
Last year, the 5th Circuit decided that the exemption applied to any funds that had been set aside for retirement. In 2010, the 8th Circuit had ruled that the bankruptcy code’s retirement fund exemption provisions said nothing about the funds belonging to the debtor. Other circuits have not addressed the issue yet.
For the couple involved in this case, the question may not be resolved until the Supreme Court rules or chooses not to take the case. No one is willing to predict which approach will prevail: the tax code’s treatment of inherited IRAs or the bankruptcy code’s general exemption of retirement funds.
Source: Thomson Reuters News & Insight, “In circuit split, court says inherited IRA fair game in bankruptcy,” Nick Brown, April 24, 2013