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Inheritances might impact decision to seek consumer bankruptcy

Inheritances and other assets obtained after the loss of a loved one often carry deeply personal meaning for the recipient. However, the receipt of any such assets can potentially impact a person's decision to seek debt relief through consumer bankruptcy. In certain situations, filing for bankruptcy can ultimately result in the forfeiture of the asset or inheritance.

IRAs -- retirement savings accounts -- are protected from forfeiture during bankruptcy since the enactment of a federal law in 2005. This is especially beneficial for those in Washington who must seek bankruptcy protection later in life and do not have the time to rebuild a retirement savings plan. While the federal guidelines make it very clear that personal IRAs are in no way impacted by bankruptcy filings, some courts are not convinced that inherited IRAs are also covered.

For instance, a person with hundreds of thousands of dollars of debt might be readying for bankruptcy when he or she becomes the inheritor of an IRA from a deceased relative. While the amount contained within the IRA might be considerably less than the debt owed, there is not necessarily the guaranteed protection associated with a personal retirement savings fund. Since the forfeiture of the inherited IRA is possible, the decision to file for bankruptcy must be carefully weighed against the benefits of retaining ownership of the inherited asset.

There are many unique nuances present in bankruptcy law, all of which can affect the individual needs of those seeking the protection of consumer bankruptcy. For some, the possible forfeiture of an inherited asset is a serious concern. However, other consumers in Washington who have reached a tipping point with their debt often realize that the need for bankruptcy protection far outweighs the desire to keep an inherited asset.

Source: post-gazette.com, "Inherited IRAs may be factor in filing for bankruptcy", Tim Grant, Jan. 29, 2016

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