Author Archives: kjones

SCOTUS Holds That Inherited IRAs Are Not Exempt Retirement Accounts in Bankruptcy

By Kelly D. Jones, portlandconsumerlawyer.com

testament-and-last-will picture for blog

Recently, in an opinion authored by Justice Sotomayor, the U.S. Supreme Court released its unanimous decision in Clark v. Rameker, holding that individual retirement account (IRA) funds that a Chapter 7 bankruptcy debtor inherited from her deceased mother are part of the debtor’s bankruptcy estate and are not protected from liquidation by the Trustee to pay her creditors.

The Supreme Court upheld the Seventh Circuit’s decision disallowing the exemption, by finding that inherited IRAs do not share many of the same important characteristics of non-inherited IRAs and thus, unlike non-inherited IRAs, are not exempt from liquidation pursuant to the Bankruptcy Code. The applicable provision, 11 U.S.C. § 522(b)(3)(C), states that a debtor may exempt “retirement funds to the extent those funds are in a fund or account that is exempt from taxation” as set forth in the Internal Revenue Code. According to the Court, the central distinctions of inherited IRA accounts are that, unlike non-inherited IRAs, the beneficiary of the inherited IRA cannot continue to invest funds into the account, IRS tax rules require withdraw of funds from the account after it is inherited, it is possible to completely drain the account upon transfer, and the withdraws, or complete liquidation, could occur long before the transferee’s retirement age.

The Supreme Court’s decision resolved a circuit split, as the Fifth Circuit had reached a contrary holding in In re Chilton in 2012. It is important to note that “inherited” IRAs are different from “roll over” IRAs, and IRAs that are bequeathed by a deceased spouse to the surviving spouse. Those accounts may still be exempt pursuant to 11 U.S.C. § 522(b)(3)(C), because the IRS rules governing these types of more traditional IRAs do not necessarily exhibit the characteristics highlighted by the Court in Clark. It is also worth noting that some inherited IRAs may still be exempt pursuant to various state exemption schemes, depending on the language of the applicable state exemption statute. Although most bankruptcy attorneys outside of the Fifth Circuit were probably already cautious in advising potential bankruptcy clients with funds in inherited IRAs, but this is another reminder that extremely careful pre-bankruptcy asset determination and planning is certainly a must.

Seventh Circuit Court Of Appeals Holds That A Settlement Offer On A Time-Barred Debt Without Any Indication That The Statute Of Limitations May Have Expired Can Be In Violation Of The FDCPA.

A recent decision by the Seventh Circuit in the consolidated appeals of McMahon v. LVNV Funding, LLC and Delgado v. Capital Management Services, L.P. , suggests that debt collectors need to take heed when collecting on debts for which the limitations period related to the underlying claim has expired. In both cases, the consumer plaintiffs had alleged that specific collection attempts violated various provisions of the Fair Debt Collection Practices Act  (“FDCPA”) (15 U.S.C. § 1692, et seq.). In McMahon, the dunning letter sent to the consumer was an attempt to collect on an alleged utility debt that originated about 14 years prior. In Delgado, the alleged debt was about eight years old. In both cases, the applicable limitations period had long since passed. Perhaps the most notable fact regarding both collection letters is that neither of the letters directly threatened litigation on the time-barred debts, as previous case law already supports FDCPA violations for such conduct (e.g., Herkert v. MRC Receivables Corp., 655 F. Supp. 2D 870 (N.D. Ill 2009). However, favorably citing a Federal Trade Commission Report titled A Broken System: Protecting Consumers In Debt Collection Litigation and Arbitration , the Court reasoned that it’s likely that many consumers do not understand their rights (not to be sued) with regard to time-barred debts, and therefore may be misled into believing that if they do not pay the settlement amount that the debt collector will then initiate litigation. The Court also addressed concerns that in the absence of any explanation that the limitations period has expired, unsophisticated consumers could be coaxed into making even a small payment on the debt, unaware that such a payment may restart the limitations period pursuant to state law. This holding by the Seventh Circuit decision stands in conflict with previous sister circuit court decisions, by the Third Circuit in Huertas v. Galaxy Asset Mgmt., 641 F.3d 28 (3rd Cir., 2011) and by the Eight Circuit in Freyermuth v. Credit Bureau Services , 248 F.3d 767 (8th Cir., 2001), and is likely to cause some ripples throughout the debt collection industry.

The Author, Kelly D. Jones , is a solo consumer rights attorney located in close-in SE Portland.