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Defining the Line Between a Fresh Start and a Free Pass – June 12, 2014 Supreme Court Decision: Clark v. Rameker

Posted on June 12, 2014 by Marissa Luznar

Bernstein-Burkley, P.C.

Today the Supreme Court of the United States issued a decision that helped further define what constitutes a fresh start as opposed to a free pass for debtors seeking to exempt assets in bankruptcy. In Clark v. Rameker, Justice Sotomayor delivered the opinion holding that inherited IRAs are not “retirement funds” within the meaning of § 522(b)(3)(C).

Typically, when an individual files for bankruptcy, he or she may exempt particular categories of assets from the bankruptcy estate, one such category being certain “qualified” retirement funds. Here, Petitioner Clark filed a petition for Chapter 7 bankruptcy and sought to exclude roughly $300,000 in an inherited IRA using the retirement funds exemption. The fund in question was inherited from the Petitioner’s mother.

The Supreme Court opined that the ordinary meaning of “retirement funds” is properly understood to be sums of money set aside for the day an individual stops working, and three specific legal characteristics of inherited IRAs provide evidence that they do not contain such types of funds. First, a holder of an inherited IRA may never invest additional money in the account, contravening the intention of such accounts, which is to incentivize accountholders to contribute regularly and over time to their retirement. 26 U.S.C. § 219(d)(4). Second, holders of these inherited IRAs are required to withdraw money from their accounts, no matter how distant they may be from retirement. Third and finally, the holder of an inherited IRA may withdraw the entire balance of the account at any time and use it for any purpose without penalty.

The Court reasoned that if an individual was permitted to exempt an inherited IRA from a bankruptcy estate, nothing about the IRA’s legal characteristics would prevent, or even discourage, the debtor from using the funds from purchasing items such as a “vacation home or sports car” immediately after the completion of bankruptcy proceedings. Further, the Court reasoned that allowing that kind of exemption would convert the Bankruptcy Code’s purposes of ensuring a “fresh start” for the debtor by allowing for basic needs to be met post-bankruptcy, to a “free pass.”

 

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