Beneficiaries of an IRA do not have the asset protection you may think

If you inherit the proceeds of another person’s IRA (“Individual Retirement Account”), your creditors may be able to reach and attach those proceeds, based upon a recent United States Superior Court Decision, Clark v. Rameker, 573 U.S. ____ (2014). What the Court held was that if a person has their own IRA then under the current Federal law, creditors can not touch the proceeds inside the account. However, retirement funds inherited by a beneficiary from the original plan participant are not considered to be “retirement funds”. To put it in plain English, at the time of your death, if you simply designate a beneficiary of the remaining funds in the account, that transfer would be considered a gift, and not an actual retirement account with the same asset protection against creditors as a retirement account. This decision was predicated on the fact that unlike the original person who invested into the IRA, an intended beneficiary must withdraw the funds within 5 years, no matter how far they are from retirement or take the minimum required distributions based upon their life expectancy. The beneficiary can also at any point withdraw all of the funds without any tax penalty. The Court discussed the fact that allowing debtors to protect funds held in traditional and Roth IRAs en­sures that debtors will be able to meet their basic needs during their retirement years, when they stop working.  At the same time, there are legal limitations to ensure a Debtor does not take those funds while they are still working without a significant deterrent. However, an inherited IRA is not meant for the same purpose. There is nothing in the law that prevents a beneficiary of an inherited IRA from immediate taking all the money to buy a luxury item, such as a sports car or a vacation home. To this end, the Court could justify treating the inherited IRA differently than a retirement account.

This recent decision, opens up the door to several problems. First, in the event a beneficiary recipient of the IRA were to file for personal bankruptcy, the Trustee would be able to take any funds that exceeded the exemptions allowed pursuant to 11 U.S.C. §522(b)(3), which as of right now is set at a maximum of $11,975. The Trustee could take those funds and could pay the beneficiary’s creditors and even take court costs, and trustee fees out. In addition, if the beneficiary were to be sued by someone for breach of contract for not paying a bill, or even was involved in a car accident, where their auto insurance did not satisfy the full amount of damages, a creditor could seek to attach all of the proceeds of the IRA.

Although this news is not very good for protection your assets for the benefit of your children, spouse or other intended beneficiaries, there is some good news that came out of the case. The court took special care to note, that proper estate planning, can still protect your intended beneficiary’s interest in the IRA funds through an Separate IRA Preservation Trust which is an irrevocable trust, where they are not the Trustee, but only a named beneficiary and where they will not have control over the asset as it were their own, but subject to the oversight of a fiduciary Trustee providing funds for the beneficiary’s benefit.

As with any blog or article on legal theories and strategy, this article is intended for informational purposes only and each person’s situation is unique. As such, before taking any action such as retitling an IRA you should consult with an attorney handling estate planning and an understanding of bankruptcy law such as the lawyers at Goldstein and Clegg, LLC.

Can you be fired for having bad credit or filing bankruptcy?

With so many people these days facing an uncertain financial future and struggling with a decline in income and increase in expenses, as well as loss of equity in their homes, we as nation are seeing credit scores dropping dramatically.  Additionally, many homeowners have suffered a loss of income and have fallen behind on their mortgages, where the only way to save the home after being denied a loan modification is to reorganize their finances though a chapter 13 bankruptcy.  One of the biggest fears that many consumers have when making the decision to file for bankruptcy or even realizing their debt increase is whether that can affect their job, which so few of us can afford to loose.  The question then begs to be answered, “I can be fired for having bad credit or filing bankruptcy?”

The short answer to this question is that in general it is unlawful to take any adverse or hostile action in the workplace for filing bankruptcy.   In fact, there is a specific Federal law (11 U.S.C. § 525(b)) that prohibits an employer from discriminating against an employee including firing that employee for filing bankruptcy.  The fresh start that comes with protections under Title XI of the bankruptcy law is constitutionally guaranteed to all as a fundamental right.  The law reads in particular,

“No private employer may terminate the employment of, or discriminate with respect to employment against, an individual who is or has been a debtor under this title [bankruptcy code]… solely because such debtor … is or has been a debtor under this title [bankruptcy code]….

There have been numerous cases filed in the bankruptcy court as well as the Federal courts seeking damages against employers for just this type of discriminatory conduct of terminating an employee due to filing bankruptcy.  For example, in the Bankruptcy case of In re Hopkins, 66 Bankr. 828, 831 (W.D.Ark. 1986), a bank terminated a valued employee after it discovered she filed a bankruptcy case.  The court held that the employer terminated her employment due to seeking protection under the bankruptcy code.  More specifically, the court applied the narrow interpretation of the law and found that if the bank could show that it discharged the employee for any reason in addition to her bankruptcy, the bank would win.  However, the bank failed to prove that the employee was anything but a very valuable and competent employee.  The company claimed that the employee, who worked in a small-town bank, would weaken its public perception and the public’s trust in the bank.  The court summarily rejected this argument, claiming that such a position would automatically act as an immediate defense for any such case and would render the relevant section of the Bankruptcy Code useless.  The court found that the bank had violated the Code because it could not establish a reason, other than the employee’s bankruptcy, to justify her termination.

The key to remember when asserting your employee rights relative to wrongful termination as a result of filing bankruptcy is that, you must be able to prove that the bankruptcy was the prevailing factor in your firing.  In construing § 525(b), most courts have applied the plain meaning of the statute.  In Stockhouse v. Hines Motor Supply, Inc., 75 Bankr. 83, 85 (D.Wyo. 1987), for example, the court stated that “an employer may dismiss an employee for any cause unrelated to the employee’s recourse to the bankruptcy laws . . . [Thus], plaintiff’s claim is defeated by a showing that his bankruptcy status was not the sole reason for his termination.”

I know, many people are concerned that their boss will find out they filed for bankruptcy and think less of them.  However, if you really think about it, most employers would probably welcome their employees filing for bankruptcy, rather then being stressed about how they are going to pay their bills.  When employees are not worried about their financial issues and whether they will have a home, they will be more productive in the workplace.  With the foregoing stated, if you feel that you have been the victim of discrimination in the workplace, don’t hesitate to contact an employment discrimination attorney in your state.

Bankruptcy Reform is needed to resolve the student loan crisis

money for schoolThere are so many young Americans who today are facing crushing consumer debt problems due to the fact that they tried to better themselves by going to a top-flight college or graduate program in order to put themselves in a position to obtain a good job. The problem is that those who attend a great school in almost every case can not do so without incurring close to if not more than $75,000 in debt. Many of these students no doubt enter into a student loan in order to finance these degrees with the best of intentions of paying the money back. However, the sad truth of the matter is that colleges are charging so much money to finance higher education that very few students will be able to ever pay back these loans without living a life of a bare minimalist.

If a consumer had any other type of significant unsecured debt if $75,000 and they came to my office, I would at the very least have a serious discussion about filing for bankruptcy. The problem is that Congress has put various limitations on Title 11 and the Federal Bankruptcy Code which restricts almost everyone from obtaining any type of debt relief on student loans. There has certainly been a lot of talk in Congress about amending the bankruptcy laws as it relates to discharging student loan debt. Yet, talk is all that we have really seen come out of the government over the past decade since the Bankruptcy Reform Act was passed in 2005.

Perhaps most disturbing are comments by far too well-off members of the legislature that try to shift the blame to the former students who are now hard working members of the American workforce. For example, House Republican, Dennis Reboletti of Illinois recently made a comment that he worked two jobs to put himself through college. Well, Congressman, you may have worked two jobs to pay for your education, but students in this day and age could work 5 full time jobs and still not even earn 10% of the funds needed to pay for their schools costs and living expenses at most major American universities.

In today’s reality, filing for bankruptcy is not an option because of the large barriers to discharge that the law imposes on student loan discharges, where a consumer needs to prove to a Federal Judge that they can not pay for the loan today and it is unlikely that they will ever be able to pay back the loan due to a medical condition.   I do think that we need to have real bankruptcy reform to avoid the need to go through adversary proceedings in order to discharge huge student loan bills, but we also need to address the overriding issue that major universities and colleges are acting like pigs with respect to the fees they are charging, simply because they realize the government will continue to allow students to borrow more and more money, and then turn around and generate large profits on the interest.