Supreme Court Protects IRAs in Bankruptcy Filings

If you are facing a bankruptcy proceeding, you can rest a little easier now that the Supreme Court has ruled your individual retirement accounts (IRAs) can't be seized.

The court's unanimous decision puts IRAs on the list with Social Security benefits, 401(k)s and pension as assets that may not be touched by creditors in a bankruptcy case.

However, President Bush has indicated his support for a bill working its way through Congress that would make it difficult for many people to declare bankruptcy, the Wall Street Journal reported.

With more than 1.6 million people filing for bankruptcy last year-double the number from a decade ago-consumer groups lauded the legislation, which will make it much tougher for middle-income Americans to erase their debts through bankruptcy, the Journal reported.

IRAs are apt to become more popular as a result of the ruling, which is good news for people with multiple creditors who worried about moving assets to IRAs after changing jobs or becoming self-employed, the Journal reported.

The Supreme Court unanimously voted to extend federal protection to IRAs:

  • Until now, only employee-sponsored retirement plans were shielded from creditors under federal law.

  • IRAs enjoyed protection under many states, but those laws varied. Because of that, many professionals were reluctant to roll over assets into these accounts from employer-sponsored plans.
  • The court didn't address whether large IRAs would be fully protected, the Journal reported.

"By protecting IRAs from creditors in bankruptcy, this decision allows workers to preserve retirement savings when, after a job change, their circumstances force them into bankruptcy," Jean Constantine-Davis, a senior attorney for AARP, told the Journal.

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