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On June 12, 2014, the United States Supreme Court unanimously ruled that Inherited IRAs are not exempt in bankruptcy.

The United States Supreme Court, in the case of Clark v. Rameker, ruled that Inherited IRAs enjoy no special protection in bankruptcy, unlike IRAs created and funded by the debtor. Even though the Bankruptcy Code exempts qualified retirement plans, IRAs and similar "retirement funds," the Court decided that this bankruptcy exemption for retirement funds does not extend to an Inherited IRA.

When a key customer files bankruptcy, one of the first questions you will face is whether to keep doing business or end the relationship. (Another key question is making sure your pre-bankruptcy claim gets on file or otherwise acknowledged.) Since companies in bankruptcy (called debtors or debtors in possession) usually cannot survive without trade support, they often reach out to suppliers to ask for trade terms, or at least a steady supply of goods, after a Chapter 11 reorganization bankruptcy is filed.

On July 22, the U.S. Bankruptcy Court for the Southern District of New York rejected a bank’s motion to dismiss a putative class action adversary proceeding alleging that certain of the bank’s credit reporting practices violated U.S. bankruptcy law. In re Haynes, No. 11-23212, 2014 WL 3608891 (S.D.N.Y. Jul. 22, 2014).

Mortgage litigators often face a variety of bankruptcy issues. There are three main chapters of bankruptcy that affect the average mortgage litigator: Chapter 7, Chapter 13 and Chapter 11. Upon the filing of Chapter 7, Chapter 13 and Chapter 11 by a borrower, the bankruptcy code provides for a bankruptcy automatic stay. The automatic stay provides that all judicial or administrative proceedings or actions against a borrower must immediately stop. This includes all foreclosure actions, eviction actions and general state court litigation against a borrower.

The U.S. Supreme Court’s recent decision in Clark v. Rameker has given individuals with IRAs a new reason to consider the use of trusts as their designated beneficiaries.  On June 12, 2014, the Court’s unanimous decision made clear that inherited IRAs do not receive bankruptcy protection under federal law.

FEDERAL EXEMPTION

Creditors in bankruptcy cases may be interested in the July 10, 2014 Opinion issued by the Eleventh Circuit in Crawford v. LVNV Funding, LLC. 

There is nothing more frustrating to a creditor than finally getting paid for goods or services, only to have a customer file for bankruptcy protection and, as a result, ending up on the receiving end of a bankruptcy preference action.

The recent unanimous decision of the United States Supreme Court (the “Court”) in Clark v. Rameker, 573 U.S. _____ (2014) held that inherited IRAs do not constitute “retirement funds” within the meaning of section 522(b)(3)(C) of the United States Bankruptcy Code. Consequently, inherited IRAs are not exempt from creditor claims in bankruptcy proceedings. The Court’s holding highlights the importance of sound financial and estate planning to protect inherited retirement plan assets from claims of a beneficiary’s creditors.

Background

One of the most dramatic tools a lender can use in the collection of a loan is the involuntary bankruptcy case.  It is dramatic because of the implications for both the debtor and the lender who files the case.