Inherited IRAs are Protected in Bankruptcy

In previous posts, we have been discussing some of the rights debtors have under bankruptcy law, such as the ability to choose when to file and the protection from having to pay creditors after debts have been discharged fair and square. Here, we talk about yet another way in which bankruptcy law seems to favor the debtor, this time in regard to the way in which Inherited IRAs are protected in bankruptcy (in a way similar to how normal IRAs are protected).

When you file for bankruptcy, your IRA (short for Individual Retirement Account) is typically protected from creditors, which means they can't get their hands on it. However, a debate has risen over whether an Inherited IRA should have the same protection in bankruptcy.

Initially, the courts ruled that Inherited IRAs should not be protected under bankruptcy in the same manner as regular IRAs are. However, when this decision was taken to an appeals court, the decision was overturned.

At the appeals court, the 8th Circuit’s Bankruptcy Appellate Panel disagreed that the funds should not be protected. Rather than focusing on who contributed the funds, the court concluded that the federal bankruptcy exemption only requires the funds to be “retirement funds” to be protected. In short, Inherited IRAs are protected if you file for bankruptcy.

In 2005 when Congress amended the bankruptcy law, most of the provisions did not benefit the consumer. However, Congress did add the provision that protected IRAs and retirement fund assets and also required states to do the same. So here again we have a pro-consumer law that favors the debtor in bankruptcy.

If you are thinking of filing for bankruptcy and have knowledge that you may be inheriting a relative's IRA or any other assets, it is always recommended that you contact an experienced bankruptcy who is well-versed in matters involving bankruptcy and inherited assets. With some types of inheritances, the debtor is not so protected, so hiring an attorney is advisable if you want to maximize the outcome of any inheritances.