Filing for bankruptcy is a last resort for most people. Questions often loom as to whether debtors will be able to keep certain assets or if the bankruptcy courts will seize those assets to repay their debts. Fortunately for Wisconsin residents, there are federal exemptions and Wisconsin exemptions available that will allow debtors to keep some of their assets, including retirement funds.
Under federal law, individual retirement accounts are exempt from bankruptcy creditors. This means that insolvent debtors are allowed to keep the retirement funds, despite filing for bankruptcy. There are limitations to this rule, however, and the exemption only applies if the IRA is owned by the debtor or was inherited from the debtor’s deceased spouse. This ruling comes from a recent case where a Wisconsin resident filed bankruptcy and claimed a $300,000 IRA fund received from her deceased mother as exempt property, not subject to her creditors. The debtor claimed the IRA was exempt under both Wisconsin exemptions and federal exemptions. The bankruptcy judge held that the IRA was not exempt because it was not held as “retirement funds” by the debtor. The case made its way to the Seventh Circuit Court of Appeals who agreed with the bankruptcy judge.
Under Sections 522(b)(3)(C) and (d)(12) of the Bankruptcy Code, retirement funds are considered exempt properties and bankruptcy creditors cannot get their hands on these funds. These retirement funds are exempt under bankruptcy law to the extent that they are in a fund that is also exempt from taxation under several specific sections of the Internal Revenue Code of 1986. Other exemptions under bankruptcy laws include up to $20,000 in homestead equity, up to $3,225 in automobiles and personal properties such as jewelry, furniture and clothing up to a certain amount.
Filing for bankruptcy does not mean that debtors have to give up all of their personal property or monies. Wisconsin residents are protected by either federal exemptions or Wisconsin exemptions depending on which one the debtor chooses to use. Bankruptcy is a complex matter and a bankruptcy attorney can help debtors to protect their properties and assets. They are able to do this through the various exemptions available and avoid a surprise taking of assets, as was the case for the Wisconsin resident above.
Source: Wealth Management, “Court rules non-spousal inherited IRA not exempt in bankruptcy,” K. Eli Akhavan, July 1, 2013