The topic of how to deal with an inherited underwater house came up recently, as did the unanswered question of whether a rent-stabilized apartment in New York City is an asset that can be included in the bankruptcy estate and liquidated by the trustee to repay chapter 7 creditors. Both issues are partly combined in a case that the U.S. Supreme Court has agreed to adjudicate in 2014. The question is whether an inherited individual retirement account (IRA) is an asset in bankruptcy. The ruling could cost people considering New York bankruptcy quite a bit of money.
Here are the facts: Heidi Heffron-Clark and her husband Brandon Clark ran a pizza place in Soughton, Wisconsin, until they hit hard times and filed bankruptcy in 2010. They owed their creditors roughly $700,000. After her mother died, Heffron-Clark inherited a $300,000 IRA. The bankruptcy code exempts IRAs, but because the IRA was inherited rather than personal to Heffron-Clark, the trustee, William Rameker, believed otherwise and initiated an adversary proceeding to include the IRA in the bankruptcy estate to repay the couple’s creditors. The bankruptcy court sided with the debtors, and then the federal district court reversed it, a decision that was upheld by the 7th Circuit U.S. Court of Appeals.
Other federal courts that have faced the matter disagree. In 2010, the 8th Circuit held that the bankruptcy code isn’t specific about whether the IRA must belong to the debtor, and in 2012 the 5th Circuit held that because retirement assets are set apart from other assets, they are exempt. The Supreme Court’s decision will resolve the split opinions among the circuit courts, and it will affect the futures of children who inherit their parents’ retirement accounts, a phenomenon that’s expected to occur more often as baby boomers retire.
Reuters did not report on whether the 2nd Circuit, of which New York is a member, has ruled on the issue of the inherited IRA. However, irrespective of the Supreme Court’s decision, it’s more important than ever for New Yorkers considering filing bankruptcy to consider the possible ramifications of inheriting large amounts of money from their relatives. That’s one more reason to consult with an experienced bankruptcy lawyer.
For answers to more questions about retirement accounts in bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced bankruptcy attorney New York Bruce Weiner for a free initial consultation.