Filing for bankruptcy can be a daunting process, especially when navigating asset protection. While Wisconsin offers exemptions safeguarding specific assets during bankruptcy, a recent case sheds light on a crucial distinction: inherited IRAs may not be exempt.
Understanding the Exemption:
Federal law typically exempts individual retirement accounts (IRAs) owned by the debtor or inherited from a spouse. However, a recent Wisconsin case challenged this. A resident filed for bankruptcy, claiming a $300,000 inherited IRA as exempt. Both the bankruptcy court and the Seventh Circuit Court of Appeals denied the exemption because the IRA wasn’t considered the debtor’s “retirement funds.”
The case made its way to the Seventh Circuit Court of Appeals who agreed with the bankruptcy judge.
Under Sections 522(b)(3)(C) and (d)(12) of the Bankruptcy Code, retirement funds are considered exempt properties and bankruptcy creditors cannot get their hands on these funds. These retirement funds are exempt under bankruptcy law to the extent that they are in a fund that is also exempt from taxation under several specific sections of the Internal Revenue Code of 1986.
Other exemptions under bankruptcy laws include up to $20,000 in homestead equity, up to $3,225 in automobiles and personal properties such as jewelry, furniture and clothing up to a certain amount.
Key Takeaway:
This case highlights the importance of understanding specific exemptions and how they apply to inherited assets. While traditional IRAs owned by the debtor are generally protected, inherited IRAs might not be.
Seek Professional Guidance:
Bankruptcy laws are intricate, and navigating exemptions effectively requires expert guidance. Consulting a bankruptcy attorney can help you:
- Understand the nuances of various exemptions applicable to your situation.
- Strategize to maximize asset protection within legal boundaries.
- Avoid potential pitfalls like the one faced by the Wisconsin resident in the mentioned case.
Remember, bankruptcy doesn’t automatically mean losing everything. By seeking professional legal advice, you can make informed decisions and protect your assets during this challenging financial period. If you are interested in learning more please reach out and we can discuss your options.
