After the debtor and her husband filed for Chapter 7 relief, the bankruptcy court ruled that the inherited IRA was not exempt because it did not constitute “retirement funds” in the debtor’s possession. The court found that “retirement funds” are funds put aside for one’s own retirement. The district court reversed, finding “retirement funds” in the decedent’s hands remain “retirement funds” in the successor’s hands. The 7th Circuit Court of Appeals reversed the district court, and disagreed with the 5th Circuit and the 8th Circuit Bankruptcy Appellate Panel. “Chilton and Nessa give weight to the phrase ‘inherited individual retirement account.’ It includes the word ‘retirement,’ after all. True enough, but the ‘IRA’ part of ‘inherited IRA’ (as the Internal Revenue Code uses the phrase) designates the funds’ source, not the asset’s current status. As we have observed, an inherited IRA does not have the economic attributes of a retirement vehicle, because the money cannot be held in the account until the current owner’s retirement,” the 7th Circuit said. Blame it on the IRS for requiring the exhaustion of the funds within 5 years.

“Chilton and Nessa also give weight to the fact that many of the other exemptions in Section 522 refer to “the debtor’s’ interests, while Section 522(b)(3)(C) and (d)(12) does not. For example Section 422(b)(3)(B) exempts ‘any interest in property in which the debtor had, immediately before the commencement of the case, an interest as a tenant by the entirety or joint tenant to the extent such interest…is exempt from process under applicable non-bankruptcy law.’ This sort of language has a temporal effect: what is exempt is the debtor’s tenancy when the bankruptcy begins… A debtor farmer cannot buy new farm implements after filing for bankruptcy and claim the acquisition as exempt.” However, bankruptcy law gives debtors a break by omitting a temporal restriction: new value added to a retirement fund during bankruptcy (an employer may continue to make retirement contributions) is outside creditors’ reach, even though new real property and new farm tools are not.

The 7th Circuit concluded that the question was not closed, and that the bankruptcy court got it right.

Lawrence Bautista Yang is a graduate of Georgetown University Law Center and has been in law practice for thirty years. He specializes in bankruptcy, business and civil litigation and has handled more than five thousand successful bankruptcy cases in California. He speaks Mandarin and Fujien and looks forward to discussing your case with you personally. Please call (626) 284-1142 for an appointment at 1000 S Fremont Ave, Mailstop 58, Bldg A-1 Suite 1125, Alhambra, CA 91803.