The Eight Circuit’s Bankruptcy Appellate Court recently rendered a decision that may affect bankruptcy cases in Phoenix and throughout the nation. According to the court, individual retirement annuities that are funded with single premiums will keep tax-qualified status and will stay exempt in a Chapter 7 or Chapter 13 bankruptcy, even if the terms of the annuity are more generous than those of most IRAs.

According to the 2005 Bankruptcy Abuse Prevent and Consumer Protection Act, company SEP IRAs and SIMPLE IRAs were protected from creditors in a bankruptcy, no matter how much money was in the account. Contributions to IRAs and Roth IRAs were also protected up to $1 million, adjusted for inflation. Given that retirement funds received so much protection, bankruptcy trustees have tried to disqualify retirement accounts in as many cases as possible.

In the case under consideration by the court, a debtor received a rather large annuity as the result of a rollover from a former IRA account. The bankruptcy trustee attempted to appeal a decision by the bankruptcy court to allow the IRA annuity to remain exempt despite the fact that this particular account offered substantial early payments, as well as a lump-sum option without penalty to the debtor. However, the Appellate Court sided with the debtor, stating that the annuity would still be exempt from creditors.

The protection of annuities and IRAs from creditors is one of the fundamental benefits of a bankruptcy for a debtor who has few other assets. A bankruptcy attorney may be able to help people determine if bankruptcy is the right way to protect their assets and, if so, which type of bankruptcy is right for their particular needs.

Source: Life Health Pro, “Bankruptcy court rules IRA annuity shielded from creditors”, Jeffrey Levine, November 20, 2013