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Chapter 7 & 13 | Consumer Bankruptcy

Retirement Accounts Awarded in Divorce May Not Be Exempt in Bankruptcy

The U.S. Supreme Court’s decision in Clark v. Rameker, 134 s.Ct. 2242(2014), saying that inherited IRAs are not exempt in bankuptcy, formed the basis for a 2018 ruling from the Bankruptcy Appellate Panel involving a different type of retirement account: divorce court-awarded IRAs and 401(k)s.

While the bankruptcy code’s section 522(d)(12) allows an exemption for IRAs, in Clark the Supreme Court held that the exemption is not available to a person who merely inherited an IRA.

In Lerbakken v. Sieloff & Assocs., No. 18-6018 (8th Cir. BAP Oct. 16, 2018), the Bankruptcy Appellate Panel extended the reasoning of Clark to IRAs and 401(k)s awarded to the other spouse in a divorce.

Like an inherited IRA, an IRA which had been funded by the contributions of one spouse, but awarded to the other spouse in a divorce, was not truly a “retirement” account.  In order to meet this definition, the spouse claiming the account as exempt in a bankruptcy had to be the spouse who set aside the funds into the IRA in the first place.

The Lerbakken appellate court also held that the spouse’s 401(k) accounts were subject to the same limitation upon their exemption in bankruptcy.

 

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