The US Supreme Court [official website] heard oral arguments [day call, PDF] Monday on individual retirement accounts (IRAs) and their interaction with bankruptcy. In Clark v. Rameker [transcript, PDF] the court will decide whether an inherited individual retirement account is exempt from a debtor's bankruptcy estate under Section 522 of the Bankruptcy Code [text], which exempts tax-exempt retirement funds. In October 2010, the Clarks filed voluntary joint bankruptcy and claimed an inherited IRA under the Section 522 exemption, which the bankruptcy trustee and creditors objected to using. The district court ruled that inherited IRAs are exempted because they retain their character as retirement funds, but the Seventh Circuit Court of Appeals [official website] reversed [opinion] that ruling. The Supreme Court must decide if inherited IRAs qualify as a "retirement fund," which will determine access to those IRAs after a debtor begins bankruptcy filings.
Earlier this month, the Supreme Court had another opportunity to rule on bankruptcy law. In Law v. Siegel [SCOTUSblog backgrounder; JURIST report], the Supreme Court ruled [opinion] unanimously that a bankruptcy court improperly exceeded its authority by ordering legally exempt funds to be used to pay attorney's costs. A trustee of a bankruptcy claim later discovered that the debtor had fraudulently represented certain liens on the his property in order to protect the $75000, and claimed the money as compensation for the added costs of discovering the fraud. The bankruptcy court agreed, and its decision was affirmed by the US Court of Appeals for the Ninth Circuit. The Supreme Court reversed, saying that the bankruptcy court exceeded its authority by using it to "sanction abusive litigation practices." The court held that the bankruptcy court had no authority to override a state law exemption to penalize a dishonest party.