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Bankruptcy May Be Your Option

Inherited IRAs are not exempt assets in personal bankruptcy

Many Oklahoma residents, who find themselves with unmanageable debt that they can’t seem to get out from under, can take advantage of a useful tool provided by federal statute in order to get a fresh start. That tool is personal bankruptcy. Bankruptcy can help people recover from the financial setbacks caused by unpredictable life situations, such as job loss and illness.

Bankruptcy can be a fresh start for those who are struggling. Therefore, the bankruptcy code allows debtors to keep certain assets that they already own to help them get back on their feet. Retirement accounts are one of the assets that have been exempt from being taken to pay back creditors. This makes perfect sense, because if debtors are allowed to keep their retirement accounts they are less likely to need to rely on public assistance in the future.

However, there has been some question over the years as to what assets qualify as retirement accounts. Individuals who open their own IRA accounts and contribute to them while they are alive may create a beneficiary designation so that those accounts are inherited by a family member after their death. The U.S. Supreme Court recently ruled that such inherited IRAs are not protected in the event that a person files for bankruptcy.

While the individual is alive, he or she can add money to the account and suffers stiff penalties for taking withdrawals before retirement age. When the IRA is inherited by a family member, its characteristics change. Money can no longer be added, and withdrawals are mandatory within a few years. These differences are part of what prompted the unanimous decision by the court.

Owning an inherited IRA is a somewhat unusual situation for people considering bankruptcy. However, it doesn’t necessarily mean that a bankruptcy is not an option. If you find yourself in such a situation where you need a fresh start, but have certain assets that you need to protect, it may be a good idea to consult with an attorney who may advise you on how best to proceed.

Source: Forbes, "Supreme Court finds inherited IRAs not protected in bankruptcy," Deborah L. Jacobs, June 12, 2014

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