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Protecting IRA Accounts in Bankruptcy

August 7, 2022 John J. Scura III Bankruptcy


Protection of a Debtors Assets from Liquidation     

Debtors have the ability to protect certain assets from liquidation in bankruptcy.  Some assets have specific exemptions set forth in the bankruptcy code which apply to that specific type of asset.  These exemptions either are for a specific dollar amount, or in some cases, are unlimited if requirements are met. 


The Exclusion of IRAs as Property of Bankruptcy Estates         

Other assets may not even be considered property of the bankruptcy estate, and thus, are beyond the reach of creditors and trustees.  One such asset is an Individual Retirement Account (“IRA”).  Section 541(c)(2) “excludes from the bankruptcy estate property of the debtor that is subject to a restriction on transfer enforceable under ‘applicable nonbankruptcy law.’” 


Exclusion of Inherited IRAs as Property of Bankruptcy Estate in New Jersey       

There are different types of IRAs. Courts have attempted to distinguish among different types of IRAs in order to discern whether or not an IRA is or is not property of the estate subject to trustee liquidation and creditor claims.  For example, one type of IRA, referred to as an “Inherited IRA”, is an IRA asset that did not originally belong to the Debtor, but rather was inherited by the Debtor as a beneficiary.  Does this IRA still maintain the qualifications that exclude it from a bankruptcy estate because it was inherited?  New Jersey bankruptcy courts have applied state law governing IRAs and ruled that it is still excluded from the bankruptcy estate despite the new ownership.  In re Andolino, 525 B.R. 588 (Bankr. D.N.J. 2015). This important decision distinguished a prior United States Supreme Court decision in Clark v. Rameker, 134 S.Ct. 2242 (2014) in which the Court applied Wisconsin statutory language to remove inherited IRAs from bankruptcy protection. The Andolino court, by contrast, applied New Jersey state law and came to a different conclusion. 


Exclusion of Roth IRAs as Property of Bankruptcy Estate    

The distinction between types of IRAs was again recently challenged when a trustee attempted to include a type of IRA known as a “Roth IRA” as part of the bankruptcy estate subject to liquidation.  Applying state law, in this instance Georgia law, the Eleventh Circuit, ruled that Roth IRAs, like traditional IRAs, are not property of the bankruptcy estate and are out of the reach of creditors.  Hoffman v. Signature Bank of Georgia, Case No. 20-12823 (11th Cir. Jan. 24, 2022).  New Jersey state law, likewise, makes no distinction between traditional and Roth IRAs when it comes to creditor exemption. N.J. Stat. 25:2-1(b).  


Limitations on Protecting IRAs in Bankruptcy Proceedings  

It is important to remember that the protection of IRAs in bankruptcy is not absolute.  If a Debtor engages in a prohibited action under the tax code, and as a result the account loses its characteristics and qualifications as an IRA, it will be subject to creditor reach. IRAs are also not out of the reach of alimony, child support and IRS tax claims. 


How Our Firm Can Help You 

During a brief consultation with one of our firm’s bankruptcy attorneys, we can provide an analysis of whether your IRA or other retirement accounts are exempt in bankruptcy. Filing a bankruptcy and fully protecting IRAs are a powerful tool to provide financial freedom from creditors and retain your assets. New Jersey has a broader statute to exempt IRAs then most states and our bankruptcy attorneys are here to assist you with that strategy.  



John J. Scura III

John fights hard for his clients and tries to educate them so they understand what is going on with their particular legal problem. John has been Certified by The Supreme Court of New Jersey as a Civil Trial Attorney. Whether it is a personal injury case, bankruptcy case, litigation case or other type of matter, John wants his clients to participate in the decision making process toward solving their problem in the best way possible.

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