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Florida readers may take an interest in a new ruling by the U.S. Court of Appeals for the Seventh Circuit Court. The court ruled that an IRA inherited from someone other than a spouse was not a bankruptcy-exempt asset. Congress has allowed retirement vehicles, including IRAs, to be claimed as bankruptcy exemptions. This new ruling disagreed with a Fifth Circuit ruling that had exempted non-spousal inherited IRAs from bankruptcy proceedings.

Bankruptcy law sections 522(b)(3)(C) and (d)(12) of the Bankruptcy Code protect retirement funds from creditors’ bankruptcy claims. The Internal Revenue Code of 1986 exempts any funds from bankruptcy if they are exempt from taxation. For example, most retirement IRAs are not taxable, so the code would also protect the funds from being used to pay debt in a bankruptcy.

The case in question stemmed from an IRA worth approximately $300,000 that was inherited by a Wisconsin woman from her mother in 2001. In 2010, the woman and her husband filed for bankruptcy; the bankruptcy trustee wanted to appropriate the funds in the IRA. The woman claimed that the IRA was exempt under both federal and state laws. The judge in the case determined that the IRA did not represent retirement funds in the woman’s hands and was, therefore, not exempt. Later, a district court judge reversed the Bankruptcy court ruling, maintaining that any fund intended for retirement in the decedent’s possession must be regarded in the same way in the successors’ possession. The bankruptcy trustee appealed the decision to the Seventh Circuit Court of Appeals, and it reversed the decision by the District Court.

As this example illustrates, bankruptcy law can be open to interpretation by judges, bankruptcy trustees and others. Individuals who are facing bankruptcy may choose to work with a Florida bankruptcy lawyer. A lawyer may be able to protect the most vital assets of the bankruptcy filer.

Source: Wealth Management, “Court Rules Non-Spousal Inherited IRA Not Exempt In bankruptcy“, K. Eli Akhavan, July 01, 2013