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Wisconsin bankruptcy case reaches Supreme Court

Bankruptcy cases are by no means a staple of the U.S. Supreme Court's docket.

This term, however, the Supreme Court has taken a couple of notable bankruptcy cases. As we discussed in our March 6 post, the Court recently ruled in a case involving debtor fraud and the homestead bankruptcy exemption.

In today's post, let's look at a case involving a woman from Wisconsin who is engaged in a dispute with the bankruptcy trustee over money in a retirement account that the woman's mother bequeathed to her.

The Supreme Court apparently took the case because federal courts have not agreed on how the bankruptcy code applies to money inherited from someone else's individual retirement account (IRA).

It is well established under bankruptcy law that someone who files for bankruptcy is allowed to keep a certain amount in retirement funds through an IRA. That amount is up to $1.3 million.

Where the federal courts have differed is on whether IRA funds that come through an inheritance are entitled to the same protection from creditors.

In the Wisconsin case, a 35-year-old woman and her husband contend that the bankruptcy trustee should not be allowed to reach $293,000 in IRA funds that the woman inherited from her mother in 2001. The woman filed for Chapter 7 bankruptcy in 2010 - many years after receiving the inheritance.

The bankruptcy trustee asserts that the inheritance money should be available to be used for repayment of debts incurred by the woman and her husband in their small business.

The case is of wide interest for a couple of reasons.

One is that Americans have a huge amount of money in retirement accounts. Many older members of the Baby Boom generation could inherit such accounts from their parents.

But many baby boomers are also in need of debt relief. And so it is up to the Supreme Court decide whether inherited IRAs are fair game for creditors despite a bankruptcy filing.

Source: The Wall Street Journal, "U.S. Supreme Court Hears Bankruptcy Fight Over Inherited IRA Money," Katy Stech, March 25, 2014

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