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Can a Bankrupt Debtor Keep An Inherited IRA?

Sassoon & Cymrot co-founder, Jeffrey J. Cymrot, helped secure a victory for creditors recently when the Federal Appeals Court in the Seventh Circuit ruled that a Chapter 7 bankruptcy debtor cannot keep an inherited Individual Retirement Account (inherited IRA).

In the Matter of Clark, Nos. 12-1241 and 12-1255, slip op (7th Cir. April 23, 2013), an adult daughter (non-spouse) beneficiary inherited an IRA valued at about $300,000 from her mother. The daughter filed a chapter 7 bankruptcy case to discharge her debt while asserting the right to retain these funds notwithstanding the bankruptcy. Over a dozen bankruptcy courts scattered throughout the United States — including one in Massachusetts and one Circuit Court of Appeals — have allowed the non-spouse beneficiary to keep, or exempt, so-called inherited IRA in this circumstance, but the Court of Appeals for the Seventh Circuit said no. Because a surviving spouse may treat a deceased spouse’s IRA as his or her own retirement account, whereas the same is not true for inherited IRAs, the appellate court held that creditors may reach the non-debtor spouse’s inherited IRA.

The decision creates a split of authority between federal circuit courts of appeal and raises the possibility that the Supreme Court of the United States will take up the matter. The National Association of Bankruptcy Trustees, which represents the interests of bankruptcy trustees appointed to represent creditors’ interests in chapter 7 bankruptcy cases, filed an amicus curiae brief supporting the trustee’s position in the case.

Jeffrey J. Cymrot co-authored the brief on behalf of the National Association of Bankruptcy Trustees. 

Jeffrey J. Cymrot is the co-practice leader of Sassoon & Cymrot’s Insolvency/Reorganization Practice and leader of the firm’s Consumer Bankruptcy Practice.

We're Excited to Announce!

Sassoon Cymrot Law and Grossman & Associates have joined together into one firm under the Sassoon Cymrot Law name effective May 1, 2021.