Assets held in individual retirement accounts are not savings that can be seized by creditors in bankruptcy proceedings, a unanimous U.S. Supreme Court said Monday.
The IRAs belonging to Richard and Betty Jo Rousey are akin to deferred wages that were intended to be used for retirement and qualify as a shielded asset from Chapter 7 proceedings, Justice Clarence Thomas wrote in overturning an Eighth Circuit Court of Appeals ruling.
The Rouseys, former Northrop Grumman Corp. (NOC: news, chart, profile) employees, appealed from a bankruptcy court ruling in Arkansas that was twice upheld.
The Rouseys had rolled their company pension and 401(k) funds into IRA accounts and, struggling to find new jobs and pay their mortgage, filed for Chapter 7 in Arkansas in 2001.
Chapter 7 bankruptcy proceedings allow the discharge of debts after the forfeiture of some assets. Chapter 13 rules are tougher, requiring the repayment of most debts under a court-ordered plan. Legislation to amend the bankruptcy rules is slated for action in the House of Representatives this week. See more on bankruptcy reform.
The bankruptcy code already prevents turning over assets in pensions and other retirement accounts that relate to a debtor’s “illness, disability, death, age, or length of service.”
Thomas rejected the bankruptcy trustee’s argument that IRA withdrawals were readily accessible enough to the Rouseys to count as savings.
“While [the trustee] is correct that the Internal Revenue Code permits penalty-free early withdrawals in certain limited circumstances, these exceptions do not reduce the IRAs to savings accounts,” Thomas wrote.
Not only is the 10% federal penalty substantial on withdrawals made before age 591/2, “the deterrent to early withdrawal it creates suggests that Congress designed it to preclude early access to IRAs.”
The Rouseys are entitled to those funds, the court said, because the accounts fall under the age exception to the bankruptcy rules.
In the 12 months ending in September, there were about 1.15 million Chapter 7 filings, according to data from the U.S. Bankruptcy Court.