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.

Here’s the case: A man filed for Chapter 13 bankruptcy and began a repayment plan approved by the bankruptcy court. All of the creditors that the man owed were told about the payment schedule and none had any objections. The man successfully fulfilled the repayment plan and the debts were discharged by bankruptcy court. After the debts were discharged, however, the company that had issued the man’s student loans protested that he still owed them $4,000 in interest, even though it was not included in the original payment plan. The case was taken to the Supreme Court, which ruled in favor of the debtor, who held that the debtor had fulfilled his Chapter 13 bankruptcy obligations and therefore did not owe the additional $4,000. The court's reasoning was because the creditor did not ever protest when they were originally told about the payment schedule.

This ruling is a positive precedent for all bankruptcy filers and provides them even more protection from creditors. If creditors fail to object to payment plans within the time they are allowed to protest, they will not be able to successfully object after the debts are discharged. In short, once your debts are discharged by the bankruptcy court, you no longer need to worry about creditors collecting any more debt.

For bankruptcy filers and debtors, this ruling should be considered a breath of fresh air. This is because ever since 2005, when the Bankruptcy Abuse Prevention and Consumer Protection Act was passed, debtors' rights under bankruptcy laws have been limited. With these two recent rulings, however, at least some important rights of debtors during bankruptcy are being established by the courts.

The Idaho case involved parents who had put money in to a 529 college savings account for their daughter. When the parents filed bankruptcy shortly after opening the account, the judge ruled that the account is considered part of their assets and can therefore be used to repay creditors. The judge ruled this because the parents had legal control over the funds they could theoretically use the money for reasons other than for their daughter to attend college if they so wanted to.

This ruling is important for bankruptcy filers because if they want to put money in a 529 savings account for their children, they will need to consider some safety measures to take first. Because money put into the account at least 720 days before you file for bankruptcy will most likely be protected, it is a good idea to invest early. The reason this condition is in place is so that filers don’t take advantage of the system by trying to save their assets by opening 529 accounts right before they file.

Another possible precaution to take if you are thinking of filing for bankruptcy is to keep the account in another person’s name – your child, for example. If they are also interested in adding education funds and are financially stable it can protect the account from creditors because the account is not legally yours.

The Idaho ruling does not mean that every bankruptcy judge will follow the same decision, but it brings up some issues about how bankruptcy can affect your children and lets filers know that it’s important to take safety measures to protect your children’s’ college savings funds. Contact a bankruptcy attorney to ensure that the money in your 529 account or any other college fund will be safe if you file bankruptcy.

McCain:
1. Proposes to spend up to $10 billion to allow some homeowners to trade high-interest, adjustable-rate mortgages for fixed-rate loans.
2. Proposes a suspension of the 18.4-cent federal gas tax and 24.4-cent diesel tax during the summer.
3. Supports a middle-class tax cut by doubling the personal tax exemption for dependents to $7,000.
4. Calls for a simpler tax system with two tax rates and a generous standard deduction.
5. Supports making permanent the 2001 and 2003 income tax cuts and proposes cutting the corporate tax rate to 25 percent from 35 percent and allowing businesses to immediately write off capital expenses.
6. Believes government assistance to the banking system should focus on preventing systemic risk that would endanger the financial system and the economy.

Obama:
1. Calls for greater government regulation of the U.S. financial system and proposes a new $30 billion economic stimulus plan to help homeowners, including a $10 billion foreclosure prevention fund to help people keep their homes and $10 billion in relief for state and local governments hit hardest by the housing crisis.
2. Outlines six “core principles for reform” that would give the Federal Reserve supervisory authority over any financial institution to which it might make credit available and calls for reform and streamlining of financial regulatory agencies.
3. Wants to repeal a provision in the bankruptcy law so ordinary families can modify terms of home mortgages.
4. Proposes a 10 percent mortgage tax credit for middle-class Americans.

Of course, campaign promises and even party platforms don't mean a whole lot, but it is interesting to observe how differently the candidates approach the problem.  Which approach makes the most sense to you – both in the near term and in the long term?

Thanks to Port Richey real estate agent Tish Osborne for publishing this comparison table on her Real Town blog.