Retirement account can’t be protected in bankruptcy, court says

If you are divorced, your debts are out of control and you’re contemplating bankruptcy, you should know that certain retirement assets may not be safe from creditors if a recent decision from a federal appeals court is any indication.

In that case, a husband received half the value of his ex-wife’s 401(k) when they got divorced. He transferred that money into his IRA account. He also allegedly owed a creditor a significant amount of money.

At some point, he filed for bankruptcy and asked the court to protect the IRA account as an “exempt” asset — an asset that creditors can’t reach to satisfy outstanding debt. Generally, retirement accounts are considered exempt, but the creditor didn’t think this particular account should qualify. The creditor objected and the court decided that retirement funds received in a divorce should no longer be exempt under federal law. The court’s reasoning was that the funds were originally set aside for the wife’s retirement, not his.

That decision followed a 2014 ruling by the U.S. Supreme Court that “beneficiary IRAs” —accounts opened with assets inherited from a deceased person’s IRA — were no longer protected from creditors because they weren’t really retirement accounts.

The more recent ruling by the appellate court only applies in certain states, but that doesn’t mean courts elsewhere won’t decide the same way. If you’re struggling with debt and have an account with assets transferred through an inheritance or a divorce, talk to a family lawyer where you live to find out how it might be treated in bankruptcy.

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