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7th Circuit says inherited IRA isn’t exempt in bankruptcy

An IRA that a debtor inherited from her mother was not exempt from creditors’ claims in her bankruptcy case, the 7th U.S. Circuit Court of Appeals has ruled in reversing judgment.

The Bankruptcy Code generally exempts from creditors’ claims any “retirement funds to the extent that those funds are in a fund or account that is exempt from taxation.” A person’s own individual retirement account (IRA) meets this requirement. The exemption also applies to an IRA inherited from a spouse.

In this case, the debtors are a husband and wife. The wife inherited from her mother an IRA worth $300,000. The debtors argued that the IRA was exempt from creditors’ claims in their bankruptcy case.

The court disagreed, explaining that the Bankruptcy Code “provides a specific exemption for retirement funds — and inherited IRAs do not qualify, because they are not savings reserved for use after their owners stop working….

“The district judge thought the question close and believed that close questions should be decided in debtors’ favor. We do not think the question close; inherited IRAs represent an opportunity for current consumption, not a fund of retirement savings.”

The court noted a contrary decision from the 5th Circuit.

U.S. Court of Appeals, 7th Circuit. In re Clark, No. 12-1241. April 23, 2013.


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