All posts by J. Wrobel

U.S. Supreme Court: Inherited IRAs are not “retirement funds” protected in bankruptcy

Protecting a qualified Individual Retirement Account (“IRA”) is important to the people who rely on their IRA accounts when they retire and from time to time, when they borrow from them in certain situations. Creditors often try to persuade debtors to cash in or borrow from their IRA to pay debts, and some people succumb to pressure when they fear losing their house, car and personal property in a lawsuit if a creditor makes good on their threats.

What many people do not know is that their IRA is protected from bankruptcy proceedings. The trustee will not make you empty your qualified IRA when collecting assets to pay off creditors. Some people call IRA assets “bulletproof” money because of its nature in being beyond the reach of creditors.

What happens, however, when you inherit an IRA account? The U.S. Supreme Court recently decided that the funds in an inherited IRA are not protected in bankruptcy.

The case of Clark v. Rameker, involves a bankruptcy petitioner, Ms. Heidi Heffron-Clark, who inherited her mother’s IRA in 2001. Nine years later when she filed her petition for bankruptcy, Clark sought to exclude approximately $300,000 held in the inherited IRA, from the bankruptcy estate, using the “retirement funds” exemption. “The Bankruptcy Court concluded that an inherited IRA does not share the same characteristics as a traditional IRA and disallowed the exemption. The District Court reversed, explaining that the exemption covers any account in which the funds were originally accumulated for retirement purposes. The Seventh Circuit disagreed and reversed the District Court.” The Supreme Court, on review, held that, “Funds held in inherited IRAs are not “retirement funds…[i]”

The Court’s analysis over whether inherited funds were meant to be treated like originally accumulated funds, by the individual owner, were the same under the legal meaning of “retirement funds” in the bankruptcy code of laws. IRAs are certainly unique and some of these features were noted in a recent Forbes article about this case, “Unlike IRA owners, inheritors can’t put additional funds into the account, and they can take money out at any time without penalty. In fact, generally, non-spousal IRA heirs must either withdraw the entire amount each year, starting by Dec. 31 of the year after the IRA owner died.[ii]”

An IRA rollover, to a spouse, is one additional notable impact of this case.

Reports on this case also note the Court’s decision does affect an individual who inherits an IRA from their spouse. They are allowed to receive their spouse’s IRA funds and have the option of rolling those monies into their own IRA – this option is only available for spouses. As mentioned in Forbes, “She can roll the assets into her own IRA and postpone distributions from a traditional IRA until she turns 70 ½. The catch is, like other IRA owners she may have to pay a 10% early-withdrawal penalty if she takes money before age 59 ½ from her own IRA.[iii]”

Here is a link to another relevant article: Five Rules For Inherited IRAs.

Joseph Wrobel, Ltd. helps people get control of their finances and a fresh start at financial freedom. The firm’s website contains informative videos about financial issues as well as bankruptcy protection for families who want a fresh start. To keep in touch and read about consumer finance news and stories you can Like the firm’sFacebook page and Follow Joseph Wrobel. Ltd. onTwitter. If you need immediate legal assistance, please call Joseph Wrobel, Ltd. by calling (312) 781-0996 to talk to an attorney.

[i] U.S. Supreme Court Opinion: CLARK et ux. v. RAMEKER, TRUSTEE, et al., No. 13-299, Decided Jun. 12, 2014.

[ii] Forbes: Supreme Court Finds Inherited IRAs Not Protected in Bankruptcy. By Deborah L. Jacobs, Jun. 12, 2014.

[iii] See Forbes article (FNii).

Bankruptcy Basics: Your current and ex-spouse and why they must be disclosed

Many of us make decisions regarding our finances with someone else. Often a spouse or a former spouse is involved in major financial decisions, in a variety of situations. Your current spouse, with whom you may own property, can certainly affect your decision to file a petition for bankruptcy protection. Likewise, an ex-spouse, to whom you may owe financial support, also is likely to chime in on legal activity involving bankruptcy. You may have heard people say, “I’m not going to tell so and so, and it is none of their business,” but the truth is it will become their business soon enough.

Yes, you must disclose your current and/or ex-spouse to your bankruptcy attorney.

We hire bankruptcy attorneys who are experienced in the law and practice of debt relief because we rely on their advice and counsel as to what works best for us in our current financial state. While it is possible that a current or ex-spouse will have no bearing on your bankruptcy case, that is a decision your attorney should make by using their knowledge and experience with the law.

Your bankruptcy lawyer needs to know about current and/or ex-spouses to the extent their income is included or somehow affects your income, for purposes of the means test necessary to determine whether you qualify for bankruptcy relief, and which chapter may be available. For example, if you pay or receive financial support as required by a divorce judgment or separation agreement, you may qualify for a Chapter 13 bankruptcy instead of Chapter 7. In the event of divorce, you might also be obligated to maintain life and/or health insurance policies, another factor in calculating potential bankruptcy outcomes.

Bankruptcy attorneys cannot help you unless you give them accurate and complete information.

If your bankruptcy attorney determines your current or former spouse is relevant to the bankruptcy, and is entitled to notice pursuant to the law, they might have to disclose the individual as a creditor to whom you owe money, or as a co-debtor also responsible for joint debts. Responsibility for debts might also be stated in the divorce judgment, and your attorney will likely need a copy of the final divorce decree.

Giving your attorney a full and complete financial picture at the first meeting at the attorney’s office is important. Based on the information you provide, your attorney can generally tell you what bankruptcy relief may be available, but only when you give them a complete and accurate financial history. This is not a time to feel shame and hide information, because if you do, things may only be more difficult moving forward.

Full disclosure of financial facts and circumstances is necessary to avoid committing a fraud on the court.

If you fail to disclose a current or former spouse to the bankruptcy court, you may have bigger problems. Of course, in reviewing and preparing your bankruptcy petition, your lawyer is likely to discover a current or former spouse the court and trustee needs to know of, however if you work to hide their existence it is possible for your petition to be filed with incomplete information, and may be considered a fraud on the court. For more information about the penalties for defrauding the bankruptcy court, please read our article, Bankruptcy Court: Go ahead and make their day.

Joseph Wrobel, Ltd. helps people get control of their finances and a fresh start at financial freedom. The firm’s website contains informative videos about financial issues as well as bankruptcy protection for families who want a fresh start. To keep in touch and read about consumer finance news and stories you can Like the firm’sFacebook page and Follow Joseph Wrobel. Ltd. onTwitter. If you need immediate legal assistance, please call Joseph Wrobel, Ltd. by calling (312) 781-0996 to talk to an attorney.

Bankruptcy Basics: July Answers to Frequently Asked Questions

Chicago bankruptcy and consumer credit attorney Joseph Wrobel shares news and updates in bankruptcy law as well as business and consumer financial matters. It has been documented that financial troubles can cause all sorts of ailments, the most common of which is sleeplessness. Joseph Wrobel helps clients alleviate their anxiety created by the inability to pay bills and the embarrassment of financial distress.

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Topics and types of FAQ covered in this 30 minute show:  

  • Do I need to list my ex-spouse on my petition for bankruptcy relief?
  • Are personal bankruptcy cases published in the newspaper; will anyone find out?
  • Can I add creditors that were omitted from my bankruptcy or do I have to re-file?
  • What happens in a marriage when one spouse files a petition for bankruptcy?

Joseph Wrobel has been a practicing attorney since 1973 and has experience in a wide variety of law relating to legal matters for individuals and families. Wrobel helps clients get out of debt and get a fresh start. He is an active member in several bar associations and the Bankruptcy Panel of Pro Bono Program of the Chicago Volunteer Legal Services. After serving the U.S. Army Reserve 363rd Civil Affairs Unit, Wrobel earned a B.A. in Psychology from Northwestern University and in 1973 he earned a JD from DePaul University Law School.

Visit our Chicago Bankruptcy Site online for more about the firm. You may also contact Joseph Wrobel for more information at (312) 781-0996 and by e-mail at JosephWrobel@ChicagoBankruptcy.com