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Supreme Courts considers IRAs bankruptcy exemption

When a case ends up in the Supreme Court of the United States, one can expect that the decision will have a significant impact on whatever the subject matter is and provide some much needed clarity. One of the issues to come in front of the Supreme Court recently is the disposition of an inherited individual retirement account in bankruptcy proceedings.

According to bankruptcy rules, people can keep up to $1.3 million in IRAs, but the bankruptcy protections given to an inherited IRA are unclear. Once an account is inherited, it does not function as retirement money anymore, the beneficiary can spend the money anyway they want.

A 35-year-old woman has taken the question to the Supreme Court as the court appointed trustee in her Chapter 7 bankruptcy proceedings is in the process of collecting money to pay off her and her husband's debts after their pizza shop closed five years ago. Chapter 7 bankruptcy is one way to wipe out most debts the court appoints a trustee to determine which debts can be paid off, but there is a specific list of exemptions, which cannot be used to clear debts, including the residential home and car and most furniture. The list of exemptions in Arizona is quite extensive.

In these difficult economic times, many people faced severe financial difficulties as their businesses struggled to recover a profit or their employer downsized their company. Filing for bankruptcy is one way people can recover from their debt, and with enough assets left over to allow them to begin their financial life anew without debt but not from scratch. As Arizona residents wait for the Supreme Court's verdict, they should keep all their options open for financial relief.

Source: Wall Street Journal, "US Supreme Court hears bankruptcy fight over inherited IRA money," Katy Stech, March 25, 2014