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Dispute over bankruptcy exemption goes to Supreme Court

When a consumer files for bankruptcy in the United States, whether it is a Chapter 13 bankruptcy or Chapter 7 bankruptcy, he or she is entitled to certain bankruptcy exemptions. The bankruptcy exemptions set forth certain items of property that are excluded or "exempted" from the bankruptcy estate for purposes of repaying the creditors. This means that the consumer can keep this property and creditors cannot take the property for repayment of a debt. One common asset that is exempt is a qualified retirement savings account, like an IRA.

Tennessee readers may find it interesting to learn that the U.S. Supreme Court will soon be hearing a case involving bankruptcy exemptions and retirement accounts. The case involves a small-town pizza shop and an inherited IRA. In 2010, the owners of the shop filed for bankruptcy after they fell into financial hardship. The married owners owed nearly $700,000 to trade creditors, mortgage lenders, their landlord and others.

One of the central issues in the bankruptcy was an IRA that the couple had inherited. While IRAs are generally exempt, the trustee for the estate argued that since the IRA was inherited, it was fair game. The couple disputed this argument. While a district court initially ruled in favor of the couple, a three-judge panel for the 7th Circuit reversed that decision. Due to a split in the U.S. Circuit Courts of Appeals, the case will now go to the highest court in the land.

Despite the drama taking place in the case above, bankruptcy is actually a fairly straightforward affair. In every consumer bankruptcy, the person filing must choose whether to file under Chapter 7 or Chapter 13. The bankruptcy exemptions that a person will receive depend on how and where a person files. In addition, the filer has the opportunity to choose between federal exemptions and state exemptions.

While this may sound complicated, an experienced debt relief professional will not only be able to assist a filer with the actual proceedings, but they will also be able to help identify the best possible route back to financial freedom available, based on that person's individual financial circumstance.

Source: Reuters, "U.S. high court to chart fate of inherited IRAs in bankruptcy," Nick Brown, Nov.26, 2013

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