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Rousey v. Jacoway Extends Bankruptcy Protection to IRAs - Sometimes.

Individual Retirement Accounts are now permitted some protection in bankruptcy, thanks to a U.S. Supreme Court case published on April 4, 2005 which held that IRA’s shall be protected from claims of creditors if three tests are met:

  1. The right to receive the payment is from a stock bonus, pension, profit
  2. The right to receive payment is due to illness, disability, death,
  3. The right to receive payment is withheld from the bankruptcy estate

The Supreme Court held that Section 522(d)(10)(E) of the Bankruptcy Code applies to protect retirements assets if the above tests are met. The third test was not before the Supreme Court, so the case was remanded to the Court of Appeals for a determination. Previously, Patterson v. Shumate held that ERISA plans were protected under the Bankruptcy Code. Thus, we are another step further in being able to protect retirement assets from the grasp of creditors during a bankruptcy proceeding.

The biggest problem in applying Bankruptcy Code Section 522(d)(10)(E) under these circumstances is in determining what portion of the retirement asset is “reasonably necessary to support the debtor and/or his or her dependents.” In California, we already have state law which protects the asset from inclusion in the bankruptcy estate to the extent reasonably necessary to support the IRA holder and his or her dependents. (California Code of Civil Procedure Section 704.115).

The next biggest problem is in determining whether to rollover a retirement benefit which qualifies as an ERISA plan.

Please feel free to contact our office to discuss options with our attorneys.