Debtor's Beware of Inherited Retirement Funds

Grandma passes away and you inherit her retirement funds.  If forced to file bankruptcy, will you be able to save the inheritance from the creditors?  

The bankruptcy court allows personal debtors in a Chapter 7 case to claim as exempt certain personal property.  Common exemptions are household items and equity in homes and cars.  Included as exempt from creditors are personal retirement accounts.  

Recently the U.S. Supreme court was asked whether a debtor can claim as exempt from creditors an inherited retirement account.  The answer was "no" in most cases.  Spouses who inherit a retirement account from their spouse are allowed to "rollover" the account into the living spouse's name.  Under this circumstance, the surviving spouse may claim the monies exempt.  Not exempt are inheritances outside the course of marriage, for example, parent to child.  

Here are some more details from the case: 

In 2001, daughter inherited $450,000 from an an IRA from her mother’s estate.  In 2010 the daughter and her husband filed chapter 7 bankruptcy.  They claimed the inheritance as exempt retirement funds.  The Chapter 7 trustee and unsecured creditors objected to the claimed exemption on the ground that the funds in the inherited IRA were not “retirement funds” within the meaning of the statute.

  

The Supreme Court held that the funds in an inherited IRA are not set aside for the debtor's retirement and thus are not "retirement funds" under the retirement exemption.  The Court found that the daughter was prohibited from investing additional money in the account.  Also, she was not required to take minimum annual distributions every year, but could withdraw the entire balance of the account at any time and for any reason without penalty.  As such, the Supreme Court held the account did not have the characteristics of a typical retirement account.  

Photo Credit:

Quinn Dombrowski at Flickr

Chapter 13 Bankruptcy: A Great Tool To Save House From Foreclosure

Central Valley California -- There are primarily two types of personal bankruptcy that you can file under the Code:  Chapter 7 and Chapter 13.  Chapter 7 is a great tool to get rid of credit card debt.  But if you are behind on house payments, Chapter 13 is the best tool to save your house from foreclosure.

Chapter 13 bankruptcy is considered the repayment plan.  The goal is to create a plan that is approved by the bankruptcy court to repay creditors over 36 or 60 months.  

Let's say that you are $10,000 behind on mortgage payments.  Your lender sends out a foreclosure notice saying that you have 90 days to cure the default.  In other words, you have to pay the lender $10,000 in 90 days.  If you do not, then the lender can foreclose on your ownership interest in the house.

Chapter 13 bankruptcy protects homeowners from the 90 day pay, or be foreclosed scenario.  By filing Chapter 13, you can propose a plan to the court that extends the 3 months foreclosure to 60 months.  It works out that instead of paying an additional $3,333.33 to catch up on payments, you can lengthen payments so that you only have to pay $166.66 dollars per month.

You will have to also make your regular monthly mortgage payment.  Also, do not forget about attorney fees and trustee fees for advising, preparing and administering the plan.  Presently, trustee's command a 6% commission and attorney fees are approximately $4,000.  These expenses are incorporated in the plan payment.  Expect the extra $166.66 plan payment to increase to about $220 per month.    

Chapter 7 bankruptcy will stop a foreclosure sales date, but only temporarily.  Chapter 7 bankruptcy in itself does not create a plan to repay past due mortgage.  A homeowner will be left with hopes of modifications, but this is not guaranteed and can result in the continuation of the foreclosure shortly after filing chapter 7 bankruptcy.