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Archive for the ‘Asset Protection’ Category

Proceeds, Rents, or Profits as “Property of the Estate”

June 9th, 2017 at 7:00 am

Assets acquired after filing under Chapter 7, such as wages, can’t be reached by the trustee. But watch out for proceeds, rents and profits. 

 

After-Acquired Property Is USUALLY Not Property of the Estate

Your filing of a Chapter 7 “straight bankruptcy” case creates a bright red line of timing. What you own at that moment of filing is potentially accessible to the Chapter 7 trustee to pay your creditors. It’s “property of the bankruptcy estate.” What you acquire later is not.

In most consumer Chapter 7 cases the trustee actually does not take and liquidate anything out of the “bankruptcy estate.” That’s because in most such cases everything in the estate is exempt—covered by the available property exemptions.

But it’s still important to know what is included in the bankruptcy estate and what is not. That’s especially true if you don’t realize that something is, and then you don’t have an exemption that protects it. As a result something that you expected to be able to keep could be taken from you.

The purpose of this blog post is to prevent this bad surprise for you when it comes to “proceeds, product, offspring, rents, [and] profits.”

The Exception

This exception to the bright timing line is pretty simple and even commonsensical. If you own something at the moment of filing, that’s property of the bankruptcy estate. The fruit of that property is also property of the estate.

Here’s how the Bankruptcy Code puts it. The bankruptcy estate includes “[p]roceeds, product, offspring, rents, or profits of or from property of the estate.” Section 541(a)(6).

The practical ways that problems arise include if:

  • an asset is exempt but its proceeds, product, etc. is not
  • an item of property is not exempt so you intended to surrender it to the trustee but expected to keep some proceeds
  • you are eventually surrendering an asset to a creditor, it little or no equity so the trustee is not interested in it, but you expected to keep its proceeds before your surrender to the creditor

The best way so explain these three are by example.

1) Exempt Asset but Proceeds Are Not

Your family dog has a good pedigree and is worth a fair amount, but is exempt. You file Chapter 7 bankruptcy when she is carrying a litter of pups. A month later 5 puppies are born, each healthy and with a fair market value of $1,000. Those puppies are property of the Chapter 7 estate as “offspring” of your dog (who herself is property of the estate).

In your state you may or may not have a “wild-card” or some other exemption that would apply to that $5,000 worth of “offspring” of the bankruptcy estate. If not the trustee could take and sell those puppies and pay the proceeds to your creditors.

2) Non-Exempt Asset’s Proceeds

You own a nice boat which is not protected by any exemption. You don’t want the boat anyway because it costs too much to maintain, so you’ll be surrendering it to the trustee. But for the last several months you’ve been renting it out to a friend for $500 per month, $200 of which covered the moorage fee in your name. You thought you’d get another rental payment or two after filing and before turning the boat over to the trustee.

But any $500 rent payments you receive after the date of filing are property of the Chapter 7 estate. On top of that the after-filing mooring fee would be a debt likely not covered by your bankruptcy case. So besides the trustee taking your renter’s $500 (or $1,000 for two months), you’d still be liable for the mooring fees. It’s a doubly bad situation.

3) Proceeds of No-Equity Property Before Surrender to Creditor

You own a rental home that’s ended up being a bad investment. It’s virtually underwater—worth about what you owe on it, and costing you more than you’re making on it. So you are filing bankruptcy and surrendering the home to its mortgage company. But you have a renter paying $1,250 monthly, and you figure you can keep a couple months of rent before surrendering the home to the mortgage holder. You’re hoping to get even more months because the bankruptcy filing may buy you more time before a foreclosure.  

But that rental home is property of the estate, even if it has negligible equity. So those rental payments are property of the estate as well, even though they are arriving after that otherwise bright red line of the date of your filing. You would have to surrender the rent payments to the Chapter 7 trustee, except to the extent there would be an exemption covering any of it.

Why You Need an Experienced Bankruptcy Lawyer

This blog post today is a lesson in why you should not file a bankruptcy without a lawyer. It’s also a lesson in why you shouldn’t file without an experienced one. Bankruptcy law is quite complex. Some of the most basic rules may seem pretty straightforward. But then there are the exceptions. And there are countless twists and turns that may or may not apply to your case. It makes sense to rely on someone who has spent years doing nothing but working those twists and turns.

 

“Property of the Estate” and “Death Benefits”

June 5th, 2017 at 7:00 am

The 180-day rule applicable to life insurance proceeds also applies to death benefits overall. Death benefits may also often be exempt.


Our last two blog posts have been about inheritances and life insurance proceeds. Death benefits work the same in a Chapter 7 “straight bankruptcy” case. That is:

  • depending on the timing of the death benefit, it may be property of your Chapter 7 estate; and
  • if it IS property of the estate, it may be exempt.

Just like inheritances and life insurance proceeds:

  • if the death benefit is NOT property of the Chapter 7 estate, it’s yours to do with whatever you want;
  • if the death benefit IS property of the estate and is NOT exempt, your Chapter 7 trustee can take it from you and use those funds to pay your creditors; and
  • if the death benefit IS property of the estate but IS also exempt, it’s protected from the trustee, and is yours to do with whatever you want.

So you can keep a death benefit either if it is not property of the estate or if it is exempt.

But First, What’s a Death Benefit?

A death benefit (which is not defined in the U.S. Bankruptcy Code) is also known as a survivor benefit. Like it sounds, it is money you receive as a result of another’s death. Death benefits can come from a decedent’s pension or retirement fund, IRA, Social Security, annuity, veteran’s benefit, and various other investment funds and retirement plans.

Death benefits may be paid in a lump sum or in monthly or annual payments. The funds may the entire amount the decedent was receiving or a set percentage of it. You may have a right only to a portion of the property, shared with other beneficiaries. Some death benefits can go only to certain specific relatives while others go to whomever the decedent designated.

The 180-Day Rule

The 180-day rule determines whether a death benefit is or is not property of your Chapter 7 estate. If within 180 days after you file bankruptcy you “acquire or become entitled to acquire” an “interest in property” “as a beneficiary… of a death benefit plan,” that property is “property of your bankruptcy estate.” It’s counted as if it was your property at the time you filed your case, even though it didn’t become yours until during that 180-day period.  (See Section 541(a)(5)(C) of the Bankruptcy Code.)

So, if you file a Chapter 7 case and the person from whom you receive the death benefit dies within 180 days thereafter, the death benefit is property of the bankruptcy estate. It potentially can be taken by the trustee and used to pay your creditors. If the death occurs more than 180 days after filing, the death benefit is not property of the estate. It’s all yours.

Death Benefit Exemptions

Just as some life insurance proceeds are exempt, many forms of death benefits are as well. It depends on the type of death benefit, and on the exemptions applicable to your state.

For example, if you qualify to use the federal exemptions you can exempt death benefits from most types of retirement plans. (Section 522(d)(12) of the Bankruptcy Code.) And similar to life insurance proceeds, you can generally exempt your “right to receive” payments “under a stock bonus, pension, profitsharing, annuity, or similar plan or contract on account of… death… to the extent reasonably necessary for the support of the debtor and any dependent of the debtor.” (Section 522(d)(10)(E) of the Bankruptcy Code.)

Many state exemption laws have similar provisions.

CAUTION: Just because an asset would have been exempt in the hands of the decedent, it is not necessarily exempt as a death benefit for the beneficiary. This entire area is complex. Courts have disagreed on aspects such as this because the law is not always clear. This is definitely an area where you want to have an experienced bankruptcy in your corner.

 

“Property of the Estate” May Include Life Insurance Proceeds

June 2nd, 2017 at 7:00 am

The 180-day rule applies to life insurance proceeds in a Chapter 7 case. But life insurance proceeds are often exempt, or protected. 

 

Last time, we explained the 180-day rule about inheritances. If within 180 days after you file bankruptcy you “acquire or become entitled to acquire” an inheritance, then the property being inherited is “property of your bankruptcy estate.” It’s counted as if it was your property at the time you filed, even though it wasn’t.  (See Section 541(a)(5)(A) of the Bankruptcy Code.)

That means to whatever extent the inherited property isn’t covered by a property exemption, or protected some other way, the Chapter 7 trustee can take and liquidate it to pay your creditors.

That 180-day rule also applies to life insurance proceeds, our topic today. (See Section 541(a)(5)(C) of the Bankruptcy Code.)

“Property Exemptions”

Most—but by no means all—people who file Chapter 7 “straight bankruptcy” can keep everything they own. That’s because everything they own fits within “property exemptions. These are protected categories of property, usually—but not always—with specific maximum value amounts.

For example, you may have available a vehicle exemption of $5,000. This allows you to keep a vehicle if it is worth no more than that. Or if you owe on the vehicle, you can have up to that much in equity (its value minus the debt).

Property exemptions can get complicated. There are often “wildcard’ exemptions that you can use on anything. Exemptions are often double the usual amount if you file a joint case with your spouse—but not necessarily. It’s not always clear what property fits within a particular exemption. Coming up with the value of your property isn’t always easy. Also, each state has its own set of exemptions, and these can be wildly different, even in adjoining states. In 19 states you can choose between that state’s exemptions or a set of federal ones. In the rest you must use the state’s exemptions. And you have to live in a state for a certain length of time or else you have to use what’s available in a prior state.

“Property of the Bankruptcy Estate” and “Property Exemptions”

It’s actually a two-step process to determine whether you get to keep everything you own.

The first step is whether it is “property of the bankruptcy estate.” If something is not “property of the estate,” it doesn’t come under bankruptcy jurisdiction. You don’t need to exempt it. If something is “property of the estate” you need to fit it within an available exemption. Otherwise the Chapter 7 trustee could take it, liquidate it, and pay the proceeds to your creditors.

Then the second step is whether something that IS “property of the estate” is protected by a property exemption.

Are Life Insurance Proceeds “Property of the Estate”?

What if someone dies before you file a Chapter 7 case leaving you money in life insurance proceeds? To the extent any of that money is still around, it’s “property of the estate.” (Be sure to talk with a bankruptcy lawyer before trying to dispose of such money before filing bankruptcy. That can be dangerous if done without competent legal advice.)

If you haven’t received the insurance proceeds at the time of filing, it would all be “property of the estate.” That’s because you are legally entitled to it even if it hasn’t arrived yet.

What if someone dies seven months after you file your Chapter 7 case, leaving life insurance money? The life insurance money is NOT property of the estate. Why? Because you did not “acquire or become entitled to acquire” the life insurance benefits “within 180 days after” filing bankruptcy.

What if someone dies within 180 days after you file your Chapter 7 case? As just implied, the life insurance proceeds would be “property of the estate.”

Are Life Insurance Proceeds Covered by a Property Exemption?

IF your life insurance proceeds ARE property of your bankruptcy estate, they may still be exempt. It depends on your state. It often also depends on your relationship with the decedent. The amount of proceeds may also matter.

For example, if you qualify to use the federal exemptions you can exempt funds from a life insurance policy that insured the life of someone of who you were a dependent so long as the funds are “reasonably necessary” for your support and that of any of your dependents.

In contrast, a number of states exempt unlimited amounts of life insurance proceeds to a spouse or dependent.

So, whether the life insurance coming to you are exempt really depends on which exemption laws apply to you.

 

“Property of the Estate” Includes an Inheritance

May 31st, 2017 at 7:00 am

If you are expecting an inheritance, or even if you are not, the special rules about them are worth your attention to prevent bad surprises. 


Most people thinking about filing bankruptcy aren’t expecting an inheritance.

But if you are, there are some very important timing rules that can affect whether and when you’ll file bankruptcy.

And even if you are not expecting an inheritance, these rules are helpful to know in case you unexpectedly do receive one.

Fixation on Property Owned at the Moment of Filing Bankruptcy

When we introduced “property of the estate” a week ago we emphasized that it’s comprised of everything you own at the “commencement of the case.”

The timing is crucial. Usually any property you acquire in the days and months after filing a Chapter 7 case is not “property of the estate.” It doesn’t fall within the jurisdiction of the bankruptcy court or the reach of the liquidating Chapter 7 trustee. You don’t have to protect that property with exemptions. It’s simply yours.

This feature is an important part of the “fresh financial start” that Chapter 7 bankruptcy provides. After that moment in time when you file your case you’re generally free to earn and acquire income and assets. They are beyond the reach of your creditors.

Inheritances are an exception to this.

The 180-Days-after-Filing Inheritance Rule

If within 180 days after you file bankruptcy you “acquire or become entitled to acquire” an inheritance, then the property being inherited is counted as if it was your property at the time you filed.  (See Section 541(a)(5)(A) of the Bankruptcy Code.)

In other words, whatever you inherit within that 180 days becomes “property of your Chapter 7 estate.” To whatever extent the inherited property isn’t exempt or protected some other way, the Chapter 7 trustee can take and liquidate it to pay your creditors.

Includes Interests in Property Acquired by “Bequest, Devise, or Inheritance”

The term “inheritance” specifically means property received through state laws distributing the property of a decedent who did not leave a will. The 180-day rule covers this.

But it also covers property acquired through a will. A “bequest” and a “devise” are provisions in a will giving away the personal property and real estate, respectively. These are also covered by the 180-day rule.

Ignorance is No Defense

It does not matter that you did not expect to receive anything through someone’s death. It doesn’t matter that you don’t even know that the person leaving you something has died. Any such property is yours for bankruptcy purposes regardless of your lack of knowledge about them.

Conclusion

So before filing bankruptcy, think about who you might possibly inherit from. Consider the likelihood that the person could die within the following six months. Talk with your bankruptcy lawyer about it. There may be some favorable ways of dealing with this situation that would protect some or all of that inheritance for you, if you inform your lawyer in advance.

 

“Property of the Estate” Excludes Property in a Spendthrift Trust

May 29th, 2017 at 7:00 am

If you are the beneficiary in a spendthrift trust, most likely a bankruptcy trustee can’t touch whatever property is in that trust.  

 

Power of Attorney vs. Spendthrift Trust

Our last blog post focused on your rights under a power of attorney over someone else’s property. A conventional power of attorney commonly requires you to use that property only for another person’s benefit. If so, then your legal control over that property isn’t enough to make that property yours for bankruptcy purposes. So if you file a Chapter 7 case the bankruptcy trustee has no power of that property. It is not included in the property of your bankruptcy estate. (Section 541(b)(1) of the U.S. Bankruptcy Code.)

A power of attorney can be created for a million reasons. But the most common probably involves an elderly parent giving someone else, often their adult child, the power to use that parent’s property to pay the parent’s expenses when he or she no longer has the mental capacity to do so. The parent’s property does not become the adult child’s property because the child has only limited control over it.

Today we look at a somewhat similar situation, with a similar result: a spendthrift trust. As with a power of attorney, as the beneficiary of a spendthrift trust you have limited control over property in the trust.

A spendthrift trust involves someone giving property to another, but that property comes with a significant restriction. Instead of giving the property directly to the recipient, the grantor puts it into a trust. The trust holds the property on behalf of the recipient—the beneficiary of the trust. The beneficiary has tightly restricted access to and control over that property. The terms of that access and control are laid out in the trust document.

The Spendthrift Clause

A trust is a spendthrift trust if it has the right restriction to access. That restriction is contained in a legally enforceable spendthrift clause.

A spendthrift clause typically states that the beneficiary cannot voluntarily or involuntary transfer its rights to the property to anybody else. “Voluntarily” means that the beneficiary can’t get at the property within the trust except as stated in the trust’s language. “Involuntarily” means that the beneficiary’s creditors can’t get at the trust property either.

Legally Enforceable Spendthrift Clause

The Chapter 7 trustee also can’t get at the trust property either as long as the spendthrift clause is legally enforceable. How do you know whether or not it is?

The Bankruptcy Code says the following:

A restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law is enforceable in a case under this title.

Section 541(c)(2). The “restriction on the transfer” referred to here is the language found in the spendthrift clause. It’s saying that if the spendthrift clause found in a trust “is enforceable under applicable nonbankruptcy law,” then it is enforceable in a bankruptcy case.

Each state has its own laws on what “restriction on the transfer” in a trust is legally enforceable. So talk with your bankruptcy lawyer about whether the trust of which you are a beneficiary has an enforceable spendthrift clause. If so the property in the trust will not become property of your bankruptcy estate. It will be protected from the clutches of your Chapter 7 trustee.

 

5 More Things to Know to Protect Your Property through Exemptions

May 19th, 2017 at 7:00 am

There’s a lot more to using property exemptions than just matching them to your assets. There are benefits worth taking advantage of.  

 

Here are some other important ways that property exemptions work in bankruptcy to protect what you own:

#6.  The difference in exemptions under Chapter 7 and Chapter 13: 

Your available property exemptions are the same in either Chapter 7 “straight bankruptcy” or Chapter 13 “adjustment of debts.” But the exemptions are used very differently in each.

Under Chapter 7, the exemptions determine whether you can keep everything you own. Chapter 7 is a “liquidation” form of bankruptcy. The bankruptcy trustee’s job is to determine whether you own anything that can be liquidated on behalf of your creditors. (See Section 704(a) of the U.S. Bankruptcy Code.) Usually you don’t because everything you own is covered by the available exemptions. But that’s why all your assets need to be matched up with exemptions to protect those assets.

Under Chapter 13, your assets are matched up with the available exemptions essentially the same way. The difference is that any of your assets not covered by exemptions are usually not taken from you. Instead the existence and value of any such non-exempt assets usually merely affects how much (if any) you have to pay to your creditors during the life of your Chapter 13 plan. (See Section 1325(a)(4) of the Bankruptcy Code.) In this way Chapter 13 can provide better protection of your assets.

#7.  Be thorough in listing assets and exemptions: 

Follow the guidance of your bankruptcy lawyer when listing your assets in your bankruptcy documents. Most important: be thorough. When in doubt, talk with your lawyer. (See this sample court Schedule A/B for the form used for this purpose.)

Not including a meaningful asset can jeopardize your whole case.

In extreme cases it can potentially even lead to criminal charges against you by the U.S. Attorney for bankruptcy fraud.

Even in less serious situations, if you don’t include an asset that would have been exempt you would likely lose the right to claim that exemption later. This could result in the trustee taking that asset from you even if it could have been protected earlier.

#8.  The Chapter 7 Trustees Have a Lot of Discretion

In most jurisdictions the Chapter 7 trustee assigned to your case will be come from a “panel” of approved trustees. Usually your lawyer has little or no ability to effect which trustee you get.

This may matter because some trustees tend to be more aggressive about claiming your assets than others. The law gives them a fair amount of discretion about this.

Plus, the value of assets can be debatable, especially unusual assets. Examples are a partially restored classic vehicle, shares of stock in an operating but troubled business, or a partial ownership interest in real estate.

So in some cases there can be more uncertainly and unpredictability about how well one’s assets will be protected in a Chapter 7 case.

#9.  This discretion can often go in your favor.

The trustee will often not seize an asset even it is likely worth more than the allowed exempt amount. Here are some of the reasons why not:

a) The asset is worth more than the exemption but by an amount not enough to “result in a meaningful distribution to the creditors.” Ask your lawyer what your trustee considers enough extra to justify the trustee’s liquidation efforts.

b) The trustee is unwilling to front the costs of collecting or liquidating an asset. For example, if you own a debt (someone owes you money) your trustee may sensibly decide that paying the court costs and attorney fees to get a judgment against your debtor is not worthwhile if that debtor could not be forced to pay the judgment.

c) The asset may come with risks that outweigh its potential value. The classic example is a parcel of land polluted by hazardous waste. The trustee has a clear right to abandon anything that is “burdensome.” (See Section 554 of the Bankruptcy Code about trustee abandonment.)

#10:  Sometimes if can be to your advantage for the trustee take an asset: 

Under certain circumstances you may actually want the trustee to take a certain asset or two that are not exempt. Or you may not mind surrendering something that you don’t need in return for the benefit of discharging your debts.

It could be to your advantage for the trustee to liquidate something you’d rather not mess with. For example, if you’ve been struggling to keep a business running, don’t know who should you pay ahead of others, it may be a relief to hand the liquation task over to a bankruptcy trustee.

It could also be to your advantage to have a trustee liquidate an asset if as a result a debt you want paid would be paid. This could happen if you owe a “priority debt,” which the trustee would pay ahead of other debts. “Priority” debts include recent unpaid income taxes and child/spousal support arrearage. Those are debts you would have to pay anyway. And if you operated a business, a priority debt could be a former employee’s unpaid wages, which you may want paid out of a sense of moral obligation.

 

As these last two blog posts have shown, there’s a lot involved in protecting your assets in a bankruptcy case. 

 

5 Things to Know to Protect Your Property through Exemptions

May 17th, 2017 at 7:00 am

Most of the time you get to keep everything you own when you file bankruptcy. It’s all covered by property exemptions. But not always.   

 

Here’s how property exemptions work in bankruptcy to protect what you own:

#1.  The basic rule:

You get to keep everything you own as long as it all fits within “property exemptions.” These are categories of assets—each usually with a maximum dollar amount—that you are allowed to have. See Section 522 of the U.S. Bankruptcy Code.

But there is a lot more to this than just matching assets to exemptions. What is and is not covered by some exemption categories is not always clear. In many states you get to choose between a federal and a state set of exemptions. You have to know which state’s exemptions apply to you if you’ve moved recently. Applying these laws often requires knowing how the state and federal statutes have been interpreted in court decisions, and/or how the local trustees and judges are enforcing them.

#2.  Federal and state sets of exemptions: 

Bankruptcy law is federal law, as the U.S. Constitution make clear. See Article I, Section 8, Clause 4 of the Constitution. But Congress has exercised its power by giving each state a choice. Each state can decide whether to allow its residents to use a federal set of exemptions in the Bankruptcy Code for bankruptcies filed in that state, or instead require them to use of a set of exemptions created by the state.

So you have to first know which set of exemptions you are allowed to use. And then, if you are allowed to use either one you need to know which of the two sets would be better for you.

#3.  You have to qualify for your state’s exemptions by living there long enough:

Which exemptions you can use can depends on how long you’ve lived in the state you’re living in now.  You can use the exemptions available in your state only if you’ve been “domiciled” there for two full years before filing bankruptcy. (“Domiciled” basically means living there during that time, but that can also depend on various factors.)

Otherwise you have to use the set of exemptions available to residents of the state you were “domiciled” in during the 6-month period immediately before those two years.

The exemption laws in your prior state may be better or worse than in your new state. Sometimes significantly so. So, sometimes it makes sense to hurry the filing of your case to take advantage of your prior state’s exemptions. Other times it makes sense to delay filing to take advantage of your new state’s exemptions. 

#4.  The importance of pre-bankruptcy planning:

You can often protect assets not covered by the available exemptions with wise pre-bankruptcy planning.  This is one of the important reasons to meet with a competent bankruptcy lawyer, and to do so as soon as possible.

Pre-bankruptcy asset-protection plans often need a relatively long period of time for them to be effective. So it’s crucial that you get thorough legal advice well before creditors’ actions force you into filing bankruptcy. Doing so can make the difference in being able to protect what’s important to you.

#5.  Paying to keep your own asset:

Although it may feel odd, you can often pay for the right to keep an otherwise unprotected asset. Chapter 7 may otherwise definitely be your best option, but you don’t want to lose something that’s not exempt. Paying to keep it may be better than spending 3 to 5 years in a Chapter 13 case to protect it.

Most Chapter 7 trustees are willing to accept your payment of the fair market value of the item, and sometimes less. That’s because you paying them can save the trustee the costs associated with selling that item. So the trustee just needs to receive the net amount he or she would receive after paying the costs from a hypothetical sale. For example, if you have a non-exempt boat you’d like to keep, you could pay a projected sale amount minus a boat broker’s sales commission, transport and storage/dockage fees, and such.

Also, many trustees are willing to accept your monthly installment payments to buy back a non-exempt asset. A trustee is willing to take some risk because you are at his or her mercy. If you don’t pay the agreed payments you will lose your ability to discharge (write off) your debts. 

Using the Right Set of Property Exemptions

May 15th, 2017 at 7:00 am

Usually you use the property exemptions available for the residents of your state. But not if you haven’t lived there long enough.

 

Property Exemptions in Chapter 7 Bankruptcy

In most consumer Chapter 7 “straight bankruptcy” cases you get to keep everything you own. That’s because everything you have fits within the property exemptions that are available for you to use.

To make sure that happens you need to:

  1. know what set of exemptions you are allowed to use
  2. apply the right exemption to each asset
  3. determine whether the dollar values of your assets fit within the maximum allowed values of the applicable exemptions

For example, if you own a guitar which has a fair market value of $500 you need to:

  1. know which set of exemptions are available to you as a residents of your state
  2. see whether that set of exemptions includes one specifically for musical instruments, or for some broader category such as “personal effects” which could include your guitar
  3. determine whether that exemption category fully covers your $500 value (including any other assets must also fit within that exemption category)

The rest of this blog post focuses on the first of these—using the right set of exemptions.

Using the Right Exemptions

Doing this takes two steps.

First step: there is a federal set of bankruptcy exemptions, and each state has its own set of exemptions. If you live in one of 19 states, you can use either that state’s exemptions or the federal ones. These 19 states are:

Alaska, Arkansas, Connecticut, Hawaii, Kentucky, Massachusetts, Michigan, Minnesota, New Hampshire, New Jersey, New Mexico, New York, Oregon, Pennsylvania, Rhode Island, Texas, Vermont, Washington, and Wisconsin.

If you live in any other state the federal exemptions are not available. You must use that state’s exemptions when you file bankruptcy.

Obviously, you’ll be in trouble if you try to use the federal exemptions if you live in any of the other 31 states, or if you use a different state’s exemptions. The trustee would object, and you’d have to change to the right set of exemptions. And then you might no longer be able to protect something of yours you thought you could.

Second step: you must qualify to use the exemptions available to those in the state where you live by living there long enough. The rule is generally simple enough. You can use the exemptions available in the state where you’ve been living if you’ve been there for two years.

More precisely, the Bankruptcy Code says it’s where your “domicile has been located for the 730 days immediately preceding the date of the filing of the petition.” (2 times 365 days = 730 days.)  See Section 522(b)(3)(A).

And if you haven’t been living in the state for a full two years, then you use the exemptions for the state where your “domicile was located for 180 days immediately preceding the 730-day period.”

An Example

So let’s say you moved 18 month ago from Pennsylvania to Arizona, after living in Pennsylvania for 6 months, and before that in Massachusetts for 10 years.

Since you haven’t lived in Arizona for two full years, you can’t use the exemptions usually available there. You don’t use exemptions available in Pennsylvania either since you were living there during the last two years not right before. Massachusetts is where you were living during the 6 months just before two years, so you use the exemptions available there.

Massachusetts is one of the 21 states giving you a choice between the federal and state’s sets of exemptions. So you file your bankruptcy case where you are living in Arizona. But you use the exemptions available in the state you lived in two states ago. And that gives you the option of the Massachusetts and federal sets of exemptions

Two Quick Practicalities

One: This two-year rule could work to your advantage as well as possible disadvantage. If you’ve moved from a state with better exemptions for the assets you own, being required to use that prior state’s exemptions could protect your assets better.

Two: To the extent that you have the flexibility to speed up or delay your bankruptcy filing, you may want to time your filing to take advantage of the more favorable set of exemptions.  

 

Are Charitable Gifts Fraudulent Transfers?

May 1st, 2017 at 7:00 am

Charitable donations made during the two years before filing bankruptcy may fall within a safe haven of not being fraudulent transfers.

The Quick Answer

To answer the question in the title directly, charitable gifts you make before filing bankruptcy COULD be fraudulent transfers. But they are not if they fit within a significant but limited exception that Congress has carved out for legitimate charities.

A Very Helpful Exception

This is important. Your bankruptcy trustee has the power, under many circumstances, to require someone you gave a gift to within the two years before filing bankruptcy to return the gift, not to you but to the trustee for distribution to your creditors. Imagine a friend, relative, your church, or other charity being ordered to return whatever money or goods you donated! Instead of your good intentions being realized, that money is used to pay the debts you’d hoped to write off.

Our last three blog posts discussed fraudulent transfers, including innocent ones. Generally, giving away something and get nothing, and do so while you’re insolvent (owe more than you own), that’s a fraudulent transfer.  The trustee can force the recipient to return the gift, but not if the gift qualifies for the charitable contributions exception.

The Elements of the Exception

To qualify for this exception the gift must:

  • consist of cash or financial instruments (stocks, bonds, options, and such)
  • be made by a “natural person”
  • be given to a “qualified religious or charitable entity or organization” under certain provisions of the Internal Revenue Code
  • either be not more than 15% of the debtor’s gross annual income during the year of the gift(s), OR, if more than that, “the transfer was consistent with the practices of the debtor in making charitable contributions.”

See Section 548, subsections (a)(2) and (d)(3) and (4) of the Bankruptcy Code.

These elements are mostly self-explanatory but are worthy a bit more explanation.

Cash and Gifts

When you think of donating assets, you may not immediately think of cash contributions. But cash or money in your checking account are certainly assets. They can be the stuff of a fraudulent transfer like any other asset. So cash contributions need to fit this exception to prevent the bankruptcy trustee from going after them.

The Statement of Financial Affairs is one of the main documents you and your bankruptcy lawyer prepare and file. Its question 13 asks: “Within 2 years before you filed for bankruptcy, did you give any gifts with a total value of more than $600 per person?” Its question 14 asks the same about “gifts or contributions” “to any charity?” If you answer “yes” to either one you need to provide details like the recipient’s or charity’s name and address, what and when you gave, and the value. So, cash and gifts are fully covered.

Natural Persons

This charitable contributions exception only applies to people, not to corporations or other business entities.

However, if you own a sole proprietorship that is not a separate legal entity and can’t file its own bankruptcy. Your business and personal debts and assets are all together, not legally distinct. So, the business’ charitable contributions are effectively contributions by you, a qualifying natural person.

Qualified Religious or Charitable Organization

Money given to help support a friend or a relative, one to whom you owe no legal obligation of support, does not qualify.

Nevertheless, frankly, practicalities may very well prevent a trustee from bothering to pursue such a friend or relative. The person may be very difficult to collect from if the money is gone and he or she is insolvent. A trustee has to seriously consider what it would cost to collect the money and the risk of never collecting. Often the money is not worth pursuing.

15% or “Consistent with the Practices of the Debtor”

Relatively few people in financial trouble have been lately donating anywhere close to 15% of their gross annual income to charity.  And even in the rare circumstances when they do donate more, those donations still qualify if making such donations reflected the debtor’s charitable giving practices.  Except in very unusual circumstances would this element disqualify any charitable donations from the exception.

Conclusion

Most payments in cash and financial instruments to genuine charitable organizations will not be fraudulent transfers. However, if you’ve made any significant charitable contributions in the last two years, review them carefully with your bankruptcy lawyer. Given the very awkward consequences if they don’t qualify for the exception, you want to make sure.

 

Fraudulent Transfers without the Actual Intent to Defraud

April 28th, 2017 at 7:00 am

Selling or giving away something innocently, without trying to hurt your creditors, could still give the trustee the right to get it back.

 

“Fraudulent Transfers” without Bad Intentions

It’s confusing: so-called “fraudulent transfers” don’t have to be fraudulent. They can be innocent of any bad intentions by you, the debtor.

In our last blog post we got into “fraudulent transfers” that DO come with bad intentions. Those involve the giving away or sales of assets WITH the “actual intent to hinder, delay, or defraud” creditors. (Section 548(a)(1)(a) of U.S. Bankruptcy Code.) Basically, we’re talking here about hiding or disposing of assets to prevent the paying of debts. “Fraudulent transfer” law allows the bankruptcy trustee to undo, or “avoid,” that gift or sale. The person who got the asset from the debtor before bankruptcy has to give it to the trustee, and then to be distributed to the debtor’s creditors in bankruptcy.

It’s understandable why assets that were fraudulently hidden from creditors should be made available to them. But should same thing happen when the sale or gift was innocent of any bad intentions towards creditors?  The law says “yes,” under certain circumstances. Today we get into those circumstances.

The Two Main Conditions for “Constructive Fraudulent Transfer”

Let’s say you have a second vehicle that you don’t need. So a year before filing bankruptcy you sell that asset and get paid what it’s worth. Then you use the proceeds of that sale to pay living expenses. Selling that vehicle is fine because you got fair market value for that vehicle.

Or let’s say you have that vehicle, but now you give it to a friend without getting anything for it. But at the time you are and continue to be solvent: you have more assets than debts. You file bankruptcy a year later because of a serious accident and huge medical bills that made you insolvent. That earlier giving away of the vehicle is fine because of your solvency at the time. You could do whatever you wanted with your assets a year earlier because then you had more assets than debts.

“Less Than Reasonably Equivalent Value” and “Insolvent”

But now let’s say you didn’t get anything for the vehicle at the time you were already insolvent. You weren’t intending to prevent your creditors from getting at the vehicle. You made no connection in your mind between that vehicle and your debts. You were just helping your good friend who needed a reliable car to get to work. Then you file bankruptcy a year later. That giving away of the vehicle is likely a constructive fraudulent transfer.

The law essentially says that regardless of your intentions, you shouldn’t be giving away assets when you have more debts than you have assets. The law says you should know better. And regardless of your intentions, your creditors should later be able to get at the value of that given-away vehicle. In bankruptcy, the trustee, standing in for the creditors, may well have a right to get that vehicle from your friend, sell it, and pay the proceeds to your creditors.

 

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