Is an IRA Protected in Bankruptcy?

Your IRA is protected by bankruptcy. An IRA, or Individual Retirement Account, is a type of retirement account now protected with Federal Creditor Protection. In April of 2005, the United States Supreme Court ruled that this type of retirement account could no longer have its assets seized for repayment of debt during the bankruptcy process. With that ruling, IRAs entered the same classification as other types of retirement accounts, including Social Security and 401k accounts. The federal bankruptcy law offers protection from this type of seizure.

Previous Laws about IRA Protection During Bankruptcy

Prior to the ruling about IRA bankruptcy protection, the maintenance and management of such assets was dependent on state laws. In some states, the funds from an IRA were subject to seizure to repay creditors during the Chapter 7 bankruptcy process. Each state made their own laws regarding these retirement funds and bankruptcy filers had to determine which laws applied, based on where they lived. National creditors often faced confusion over which states they could request IRA account seizure during the bankruptcy process. The 2005 law helped to provide more standardized rules.

The Supreme Court heard the case only after a lower court ruled that these types of accounts were similar to a savings account. There is no protection for savings accounts in Chapter 7 bankruptcy. The lower court ruled that since account holders could withdraw funds from an IRA, these accounts should have the same regulations as savings accounts. However, the upper court ruled that this was not the fact.

In his writing in the ruling made by the Supreme Court, Justice Clarence Thomas wrote that the Individual Retirement account was not similar to a savings account mainly because of the penalties imposed on the account if account holders withdraw funds prior to a specific age. Thus, the federal statue is in place to protect the account as a retirement account.

The only possible loop hole in this ruling comes in to play in regards to very large IRAs. Your IRA is protected by bankruptcy liquidation if it is considered reasonably necessary. Some very large IRAs, on the other hand, may be too large to fit such a ruling, which is part of the country's bankruptcy code. Most people do not have to worry about having too much money in these accounts, though. Unless you have a significant amount of money in the account that pushes you to an unreasonable level, bankruptcy laws protect your IRA.

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