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Appellate bankruptcy case ruling invites Supreme Court weigh-in

Debt forgiveness as a social concept is something that can be traced a long way back in history. In the Bible, the Old Testament highlights the Year of Jubilee as one that occurs about every 49 years and which requires that creditors release all debtors from their obligations.

These days, in Arkansas and the rest of the U.S., debt forgiveness is found through various debt management options that include the legal processes that include filing for bankruptcy under codes that include Chapter 7 and Chapter 13 personal bankruptcy.

But while the options are available uniformly across the country, that doesn’t mean that the rules are applied the same in every jurisdiction. This was highlighted recently by a decision in a bankruptcy case out of the 7th U.S. Circuit Court of Appeals in Chicago. The judges of that court ruled late last month that money inherited as part of an Individual Retirement Account may be subject to being forfeited to creditors in a bankruptcy.

Specifically, the court said that while bankruptcy law exempts retirement money from creditors, that exemption doesn’t carry over if funds in an IRA are handed over to heirs of the beneficiary. They cease to be retirement funds.

Not only did the decision reverse a lower court ruling, it also goes against decisions made by the 5th and 8th Circuit Courts, the latter of which covers Arkansas. In separate cases, one in 2010 and another last year, those courts held that money in retirement funds are exempt, regardless of who holds them.

When appeals courts split on issues in this way the typical path to resolving the conflict is by taking the matter to the U.S. Supreme Court. That hasn’t been done in this instance that we know of, and it’s not clear if the petitioners in the bankruptcy case will file such an appeal.

What we hope readers take away from this is recognition that the unique nuances of any given case may complicate the processes and raise questions of law that need to be argued in court. That being the case, it’s always best to have the help of an experienced attorney.

Source: Thomson Reuters, “In circuit split, court says inherited IRA fair game in bankruptcy,” Nick Brown, April 24, 2013

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