On March 25, 2014, the U.S. Supreme Court heard arguments in Clark v. Rameker, a case dealing with retirement funds in a bankruptcy case. The way the Court interprets the Bankruptcy Code in this case could have an impact on future bankruptcy cases across the U.S.
Inherited IRA funds in a bankruptcy
The matter before the Court stems from a personal bankruptcy case filed in 2010 by a husband and wife after the pizza shop they had opened failed. At the time the couple filed bankruptcy, they owed about $700,000 to their landlord, mortgage lenders and other business creditors.
The wife had inherited about $450,000 from her mother's IRA when her mother died. The couple argued that the funds were protected from their creditors, as retirement funds are part of the Bankruptcy Code's listed exemptions. The trustee administering the bankruptcy case believed that the funds were available for repaying the couple's creditors. The trustee was initially successful, but the decision was reversed by the district court. The trustee appealed to a three-judge panel in the appellate court, which held that the funds ceased to be protected when they were inherited.
Split in the courts
The appellate court's decision conflicts with two other court decisions in other circuits holding that retirement funds remain protected even if they are passed along to another person through an inheritance. The Supreme Court's decision in this case will settle the split among the lower courts.
In order to settle the matter, the Court must interpret Section 521(b)(3)(C) of the Bankruptcy Code, which states that "retirement funds to the extent that those funds are in a fund or account that is exempt from taxation" are protected in bankruptcy cases. Both sides in the case admitted that the IRA funds in this case were exempt from taxation, but the Court must determine whether that protection is limited to retirement accounts created with a bankruptcy petitioner's own funds.
The Court noted that the retirement funds exemption is the only one listed in the Bankruptcy Code that does not specifically note that it has to be the petitioner's property, so Congress could have intended for retirement funds to remain exempt even if inherited. However, some justices expressed hesitation during the oral argument to declare that inherited assets were exempt.
Speak with an attorney
As Clark v. Rameker demonstrates, bankruptcy laws are complex. Those considering bankruptcy should seek the assistance of a seasoned bankruptcy attorney before proceeding. A skilled attorney can help ensure that a person's bankruptcy petition is filed properly and that the case goes smoothly. If you are thinking of filing bankruptcy, speak with a bankruptcy attorney who can advise you what steps to take.