IRAs Protected in Bankruptcy

Are you thinking you got the wrong blog? Bankruptcy law? What does John Day know about bankruptcy law?

The answer is “absolutely nothing.” Well, that is not quite true; I know enough about bankruptcy law to know when to call a bankruptcy lawyer.

But this opinion caught my eye. In Rousey v. Jacoway the United State Supreme Court ruled that creditors may not seize individual retirement accounts in bankruptcy proceedings. Several other courts had reached a contrary position, reasoning that since one can withdraw money from an IRA before retirement the assets in the IRA should not be protected from creditors. The 9-0 opinion was authored by Justice Thomas.

What does this have to do with tort law?

Well, from time to time you have to collect judgments from a defendant tortfeasor individually, and it is helpful to know that you will not be able to reach IRA assets. Also, it is also helpful to know that you cannot reach an IRA when determining whether or not to accept a “policy limits” settlement.

Furthermore, when you reach a “policy limits” settlement with a defendant and are trying to negotiate a reduction in a Tenncare or other subrogation interest, you will now be able to tell your opponent with certainity that the assets contained in the IRA cannot be reached in bankruptcy court.

There are two additional points to consider. First, the bankruptcy code protects a “reasonably necessary” portion of a debtor’s retirement assets from being reached by creditors. The meaning of that phrase was not addressed by the court.

Second, under the new bankruptcy bill working its way through Congress the IRA exemption would be capped at $1,000,000.