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Chapter 7 Filer May Exempt IRA Inherited From Grandmother, BAP Rules - In re Hamlin

February 24, 2012

Vincent Howard and our team of Rancho Cucamonga personal bankruptcy attorneys were interested to see a ruling that establishes new rights -- at least for now -- for California bankruptcy filers. In In re Hamlin, the Ninth U.S. Circuit Court of Appeals Bankruptcy Appellate Panel ruled that Chapter 13 filer Brittany Hamlin may exempt an IRA she inherited from her grandmother. While retirement funds are generally privileged in bankruptcy, the issue of whether an IRA can be exempted when it is inherited from a non-spouse was one of first impression for the panel. Hamlin and her husband, Travis Hamlin, filed for Chapter 7 bankruptcy in Arizona several years after the 2004 death of Brittany's grandmother. The bankruptcy court allowed this to be exempted over the trustee's objections, and the BAP affirmed.

The inherited IRA was held in trust for Brittany between her inheritance and the bankruptcy filing, and was worth nearly $32,000 on filing. The Chapter 7 trustee objected to the exemption, arguing that inherited IRAs are not treated like traditional IRAs funded by the debtors. After an initial hearing and supplemental briefing, the bankruptcy court determined that the IRA would be exempt under a section of the 2005 bankruptcy law amendments that exempts tax-exempt retirement funds. However, because there was some question about whether Brittany had maintained the account's tax-exempt status, the court signaled willingness to hear further motions. The trustee continued to object after the Hamlins filed an amended Schedule C, arguing that they should not be permitted to use federal exemptions after initially claiming state exemptions for this purpose. This too was rejected after a hearing, and the trustee appealed.

The Ninth Circuit BAP affirmed. Under the 2005 law, debtors may take federal exemptions for retirement funds even if, like Arizona, their states don't allow them to use federal exemptions otherwise. This exemption exists for funds that are retirement funds and are in an account exempt from federal taxation. Nearly all courts that have decided whether this applies to inherited non-spouse IRAs have agreed that it does. The BAP rejected arguments that the funds in such an IRA are not "retirement funds" under the law, saying the statute's plain language says they are. And while an inherited IRA is treated differently from a self-funded one, the BAP found that it was nonetheless exempt from taxation under the federal tax code. The court also found support in a provision that continues the exemption for accounts transferred from trustee to trustee, precisely the situation of an inherited IRA.

Vincent Howard and our Yorba Linda individual bankruptcy lawyers are pleased to see a decision that allows debtors to keep more of their IRA funds when they file for bankruptcy. Though this decision applies only in the Ninth Circuit, and may be reviewed by the Ninth itself, it comes with a great deal of backing from other courts around the United States. All of these decisions must necessarily have come within the last six and a half years, since the bankruptcy provision in question was adopted with BAPCPA in October of 2005. An inherited IRA is subject to a lot of federal rules that make it difficult to use with the flexibility of an ordinary account -- something the Hamlins may have found out firsthand -- but it can still be valuable for people struggling to keep up with their financial obligations after an event like bankruptcy. That's why the Vista consumer bankruptcy attorneys at Howard Law, P.C., work to exempt every asset that makes sense to exempt for our clients.

If you're deep in debt and don't believe you can ever get out on your own, you should call Vincent Howard and our legal team to discuss the possibility of a bankruptcy. For a consultation, send us an email or call 1-800-872-5925.

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