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7th Circuit: Creditors can access inherited IRAs in bankruptcy

Sometimes, major bankruptcy questions are left unresolved on a bigger scale when circuit courts do not agree. This creates an unsettled issue that is ripe, meaning the question is often appealable to the Supreme Court. An appeals court has recently decided that that inherited retirement accounts (IRAs) are not exempt from bankruptcy creditors in a bankruptcy case. This ruling differs vastly from rulings in other circuits.

With this ruling, a woman cannot keep creditors from going after $300,000, which she inherited from her late mother. The chief judge for the 7th Circuit Court of Appeals wrote the decision.

However, the U.S. Supreme Court could potentially consider the matter in the future.

This is because there is a difference in how people with IRAs will be treated in various circuits. Other circuits have protected inherited retirement accounts from creditors. Therefore, the issue is appealable.

The case is a battle between the woman (and her husband) and the trustee assigned to the bankruptcy case. In 2011, a bankruptcy judge ruled that the IRA was accessible by creditors; however, but a district court later reversed.

The recent appellate decision affirms the bankruptcy court's initial assessment. The ruling explains that while IRAs are generally exempt, those inherited from previous owners are fair game for creditors.

However, the decision is in direct disagreement with the 5th and 8th Circuits. Moreover, even the judge who wrote the opinion noted that the ruling would be in conflict with other courts. With this, the woman could potentially appeal to the higher court, assisting with the creation of a final disposition on issue.

If you are struggling financially, you may benefit from speaking with a qualified bankruptcy attorney in your area. A lawyer can help you understand your available rights and responsibilities.

Source: Reuters, "In circuit split, court says inherited IRA fair game in bankruptcy," Nick Brown, April 24, 2013

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