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Chapter 13 or Chapter 7 bankruptcy may affect retirement accounts

When people file for bankruptcy, they often don't realize the complex set of laws that dictates the proceedings. One of the areas that is turning especially complex is that of retirement accounts. While it has long been held that retirement accounts are exempt from bankruptcy proceedings, a recent ruling by the United States Supreme Court made it clear that not all retirement accounts are exempted.

In the ruling, the Supreme Court ruled that IRAs that are inherited aren't exempt from bankruptcy proceedings. This means that creditors can stake claim to the accounts. This ruling will affect mostly non-spouse beneficiaries, such as children, because those beneficiaries can't move the IRA into an account that is held under their own name.

The logic behind the ruling, according to Justice Sonia Sotomayo, is that IRAs that are inherited aren't held to the same standards as regular IRAs. Instead, inherited IRAs can be used for anything the beneficiary wants at any time. This includes making purchases as soon as the bankruptcy proceedings are complete.

Because Pennsylvania isn't one of the seven states that guarantees the safety of IRAs in bankruptcy proceedings, it is important for anyone to understand how bankruptcy can affect the retirement account. This is as true for spouses as it is for any other relationship.

For anyone who is considering filing Chapter 13 or Chapter 7 bankruptcy, learning about stipulations like this one can often help them to make a decision about how to proceed. The complexities of the law can often be difficult to understand and time-consuming to keep up with because of various rulings.

Source: Fox Business, "The Fastest Way to Lose an IRA," June 23, 2014

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