When you plan to file for bankruptcy, you need to figure out what exemptions apply to you. Exempted assets are generally protected from creditors during bankruptcy proceedings.
But it’s important to stay appraised of any changes to the law. A recent US Supreme Court decision on inherited IRAs has potentially affected many people who are planning to file for bankruptcy or are in the midst of bankruptcy proceedings.
What did the US Supreme Court decide about inherited IRAs?
When non-spousal beneficiaries inherit an Individual Retirement Account (IRA), they often think that because it’s a retirement account, it will be exempted from bankruptcy proceedings. However, the Supreme Court decision of Clark v. Rameker found that, at least on a federal level, inherited IRAs aren’t protected from creditors.
The case involves a woman who inherited an IRA from her mother. She and her husband began to take monthly distributions from it. Nearly a decade later, they tried filing for Chapter 7 bankruptcy; during bankruptcy proceedings, they tried to treat the inherited IRA as an exempted asset, as there was still a few hundred thousand dollars in it. However, the bankruptcy trustee and creditors in their case argued that under bankruptcy law, an inherited IRA is not really a retirement account. The US Supreme Court wound up ruling unanimously in favor of the bankruptcy trustee.
Does this affect you in Ohio?
At the level of state law, most states don’t have any explicit exemptions for inherited IRAs. However, Ohio is one state that does have this exemption. (This article mentions some of the others, including Florida, Arizona and Texas.) And, while other states may allow you a choice between federal and state exemptions, if you file for bankruptcy in Ohio, you have to use the state exemptions.
One of the reasons it’s important to work with a bankruptcy lawyer is that your lawyer grasps all the ins and outs of the law, including any changes that may wind up affecting you; your lawyer can also reassure you about changes that won’t likely have any bearing on your case.