When a consumer files for bankruptcy protection, a trustee is assigned to their case to essentially organize all of the creditor claims and determine what assets could be liquidated or how much the consumer can pay towards satisfying the debts. All assets and liabilities are considered in the process, but it does not mean that a creditor can reach every single asset.
The whole point of bankruptcy is to set up an individual with the fresh start necessary for a successful financial future, thus some assets or income are exempt from creditor claims. Retirement accounts are one type of fund that Congress has determined deserve exemption status, but does this cover all retirement accounts?
Retirement accounts, as their name suggests, are most often set up to help provide for individuals after they have reached the age where they quit working. This certainly doesn’t mean that the funds are only distributed under this structure.
Individual retirement accounts or IRAs are often transferred to a spouse or other family members. Whether or not an IRA inherited from someone other than a spouse — such as a parent — was considered exempt depended entirely on the jurisdiction of the court.
Under the Bankruptcy Code, there are sections that exclude retirement funds, but are these inherited accounts really for the purpose of retirement?
The Supreme Court of the United States recently made a ruling that said no. Part of the reasoning was that the funds from these inherited accounts must begin distribution only a year after the death of the original owner and no new contributions could be made nor could it merge with another account.
Source: Wealth Management, “Court Rules Non-Spousal Inherited IRA Not Exempt In Bankruptcy,” K. Eli Akhavan, July 1, 2013