Will Inherited Retirement Accounts Lose Bankruptcy Protection?

Retirement accounts are usually protected against creditors in bankruptcy. In other words, if you're overwhelmed by debt, don't take money out of your 401(k) to pay credit cards or medical bills, if you can help it. Most or all of your retirement account will remain yours after bankruptcy.

But Nick Brown with Reuters Legal reports that Judge Frank Easterbrook, a well-known federal appeals court judge, issued an opinion last week saying that inherited retirement accounts are not protected.

Easterbrook wrote: "[Retirement accounts] are not a place to hold wealth for use after the new owner's retirement." He also wrote: "[Retirement accounts] are not savings reserved for use after their owners stop working."

Thus, creditors could potentially get access to the inherited retirement account to satisfy debt owed them.

Brown points out that the ruling "clashes" with other rulings in similar cases. These other cases have generally gone the other way, stating that a retirement account is a retirement account, regardless of whether or not it was inherited.

Some legal commentators think that this is an issue ripe for the U.S. Supreme Court, but Easterbrook's ruling doesn't really change anything for the majority of Chicagoans who are buried in debt, facing tremendous emotional struggle, and are considering the need for a fresh start - a fresh start that still generally includes the protection of your retirement account.

Source: In circuit split, court says inherited IRA fair game in bankruptcy

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