Supreme Court to Decide the Plain Meaning of Retirement Funds

February 2014Articles American Bankruptcy Institute Journal

When Congress enacted the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), a debtor’s ability to exempt an interest in a retirement account was expanded through the addition of several new subsections to § 522 of the Bankruptcy Code. Pursuant to the identical provisions of §§ 522 (b) (3) (C) and 522 (d) (12), debtors may exempt "retirement funds" to the extent that the funds are exempt from taxation under various sections of the Internal Revenue Code (IRC). Although the Bankruptcy Code does not define "retirement funds," the exemption encompasses 401k plans, pensions, profit-sharing plans and individual retirement accounts (IRAs), among other instruments.

An ambiguity arises, however, in whether the exemption incorporates retirement funds inherited by debtors from non-spouses. While there had been an apparent emerging consensus following the lead of the Fifth, Eighth and Ninth Circuits, perceiving that the plain language of the provisions dictated that retirement funds are exempt regardless of original ownership, Chief Judge Frank Easterbrook of the Seventh Circuit unleashed a diametrically opposed broadside in April 2013 in the case of In re Clark. The new divergence among the circuits is rooted in differing conclusions with respect to application of the same rule of statutory construction, and has sparked enough of a debate that the U.S. Supreme Court has decided to hear In re Clark on appeal.

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