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Archive for the ‘exemptions’ tag

No Means Test If You Fit within a Military Exemption

June 28th, 2017 at 7:00 am

There are two military-related exemptions from the Chapter 7 means test. They are narrow but if you qualify that can be a major advantage.


The Benefit of Avoiding the Means Test

We introduced the “means test” two blog posts ago. This test determines whether you qualify for a Chapter 7 “straight bankruptcy” or instead must do a Chapter 13 “adjustment of debts” case. It’s based on your income, or if your income is not low enough your expenses play a part as well.

Although most people who want to file under Chapter 7 could pass the means test, not everybody could. For them being able to skip the means test can be a very big deal. A Chapter 13 case requires you to pay your debts to the extent your budget allows for a period of 3 to 5 years. In great contrast, a Chapter 7 case usually “discharges” (legally writes off) most debts without you paying anything.  And the cases usually only last about 4 months.

So if Chapter 7 is what you need, you can see why skipping the means test could be very important.

Completely Avoiding the “Means Test”

The two exemptions from the “means test” related to military service are:

1) the disabled veteran exemption, and

2) the active duty/homeland defense exemptions.

The law clearly states that under these exemptions you can completely avoid the means test.  It says that “the [bankruptcy] court may not dismiss or convert [into Chapter 13] a case based on any form of means testing” if either of these exemptions apply. (See Section 707(b)(2)(D) of the Bankruptcy Code.)

1) The Disabled Veteran Exemption

You can avoid the “means test” under this exemption by meeting two conditions:

First, you are “disabled veteran.” This means that either

a) you are entitled to veteran disability compensation by being least 30% disabled; or

b) you have been discharged from service, or released from active duty, because of “a disability incurred or aggravated in line of duty” (as defined in 38 U.S.C. Section 3741(1)).

Second, your “indebtedness occurred primarily during a period” in which you were either:

a) on “active duty,” meaning “full time duty in the active military service of the United States” (10 U.S.C. Section 101(d)(2)); or

b) “performing a homeland defense activity.” (See definition in 32 U.S.C. Section 901(1).)

On a practical level this second condition seems to be a challenging one.

Think about it. Let’s say you incurred most of your debts before you joined the military, then became disabled while on active duty. So if you then couldn’t pay your debts and needed to file bankruptcy, this exception wouldn’t apply. Your “indebtedness” would not have “occurred primarily” during your active duty but rather before it.

Or let’s say if you didn’t have much debt when you went on active duty. But then you became disabled while on active duty. If you then incurred most of your debt AFTER being released from active duty because of your disability, your “indebtedness” would not have “occurred primarily” during your active duty but rather after it.

In either of these situations you’d still have to pass the means test to go through a Chapter 7 bankruptcy. You don’t if your “indebtedness occurred primarily” while you were on active duty.

2) The Active Duty/Homeland Defense Exemption

This second exemption is much broader. Unlike the above, the timing of your debts in relation to the time of your service does not matter. But this exemption from the means test comes with a very quick deadline to qualify for it.

You are exempt from the means test if at any time after September 11, 2001 you were (or still are) a member of the Armed Forces or the National Guard who served either in active duty or for the homeland defense for a period of at least 90 days. See Section 707(b)(2)(D)(ii) of the Bankruptcy Code.

To use this exemption you must file your Chapter 7 bankruptcy case either:

  • during your term of duty, or
  • within 540 days (about a year and a half) after it ends.

Conclusion

The disabled veteran exemption requires your indebtedness to have “occurred primarily during” your period of service. With the active duty/homeland defense exemption, to use it you must file your Chapter 7 case during or within 540 days after completing your service. Ask your bankruptcy lawyer whether you can skip the means test by fitting within one of these two exemptions.

Again, even if you don’t think you qualify for either of these exemptions, remember that most people needing to file a Chapter 7 case can pass the “means test” and so don’t really need an exemption from it.

 

“Property of the Estate” in Chapter 7 Bankruptcy

May 24th, 2017 at 7:00 am

To find out if you can keep everything you own in a Chapter 7 case, the first step is finding out what’s in your bankruptcy estate.

 

In most consumer Chapter 7 bankruptcy cases, the person filing the case (the debtor”) gets to keep everything they own. But getting to that point is a process. The first step in that process is understanding “property of the estate.” (The later step is to determine whether all of the property of your estate is protected, or “exempt.”)

An “Estate” in Bankruptcy

We normally think of an estate as the property owned by a person at the time he or she dies. But more broadly it’s “all the property and money that belongs to someone.” In bankruptcy it has an even broader meaning, including a number of categories of property.

When you file a Chapter 7 case, doing so automatically creates an estate. That estate includes a different categories of property. Today we’ll focus on what for most people is the main category. In most simple cases it is the only category of property involved in your Chapter 7 case.

“All Legal and Equitable Interests of the Debtor”

This first category iincludes “all legal or equitable interests of the debtor in property as of the commencement of the case.” This essentially means everything you own at the moment you file your case. See Section 541(a)(1) of the U.S. Bankruptcy Code.

Property “Wherever Located and by Whomever Held”

Whether or not you have possession of something, or where it happens to be located, do not matter. See Section 541(a) of the Bankruptcy Code.

If it’s legally yours, then even if it’s not in your possession when you file your Chapter 7 case, it becomes property of the estate.

If it is not legally yours although it’s in your possession, it does not become property of your Chapter 7 estate.

Here are a couple examples. If you borrow your sister’s rifle for a hunting trip and just haven’t returned it at the point you file your case, that’s NOT part of the property of the estate. However, if your dad gifts you his rifle, which you keep in his gun safe away from your kids, that rifle IS property of the estate.

At “the Commencement of the Case”

Timing is crucial and precise.

The “commencement of a case… creates an estate. Such estate is comprised of…  all… interests of the debtor in property as of the commencement of the case.” 

This means that the property of the estate excludes something you owned the day before filing but no longer do. It means that the property of the estate excludes something you didn’t own until the day after filing.

For example, if, on the day before filing bankruptcy, you spend $1,000 on food and a vehicle repair, that $1,000 is not property of your bankruptcy estate. Or if, on the day after you file, a relative gives you $500 to buy school clothes for your kids, that $500 is not property of your estate.  

Important Timing Exceptions to the “Commencement of a Case”

There are exceptions. Property of the estate can sometimes include certain possessions and money you owned before filing bankruptcy. It can also include possessions and money you got after filing. We’ll get into these in our next few blog posts.

 

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.  

 

The Chapter 7 Trustee Challenging an Asset’s Value

May 12th, 2017 at 7:00 am

What happens when your bankruptcy trustee thinks you undervalued an asset? How does the trustee determine what you own and its value? 

 

Last time, we got into what happens when your asset (“property) and exemption schedules show you have an unprotected asset. In that scenario you own something that is not covered by an allowed exemption. So it is not exempt from the Chapter 7 trustee’s reach.

We mentioned two other scenarios. What happens if:

  • the trustee believes you may have undervalued an asset, or
  • the trustee disputes that an exemption you claimed applies to your asset?

We’ll cover the first of these two today, and the second in our next blog post.

Your Valuation of Assets

The starting point for what your assets are worth is the value you give to them in your asset schedule. That form asks for the “current value” of the property.

You put your signature on a “Declaration” page right below the following sentence:

Under penalty of perjury, I declare that I have read the… schedules filed with this declaration and that they are true and correct.

So the values you give for what you own need to be “true and correct.” That essentially means that you need to be honest and reasonably accurate. You are not an appraiser and are not expected to provide expert valuations. So follow your lawyer’s lead about the valuation standards. For example, the “fair market value” of your household goods can be thought of as what somebody would pay for them in a garage sale. Also, you can get reasonably objective information on the values of larger items like homes and vehicles. Occasionally a professional appraisal may be worthwhile with unusual and more valuable items.

The Trustee’s Sources of Information about Value

Besides looking at your bankruptcy schedules, the trustee can:

1. Ask you about particular items at the “Meeting of Creditors” about a month after you file your bankruptcy case. He or she could ask how you came up with the stated value, and for details about the item. These “Meetings” usually take less than 10 minutes so there isn’t much time for extensive questioning, and often the trustee finds nothing of interest to ask about. But this is where he or she will usually signal a concern about the value you assigned to something.

2. Arrange to have a valuation expert see it and provide an opinion of its value. Occasionally the trustee will have you take something to an appropriate expert, or have the expert come to see it.

3. See the item him- or herself to assess its value. The trustee has a right to inspect anything you own. To be clear, in the vast majority of cases the trustee does not bother to look at ANYTHING of yours. But it’s always a possibility.

If the Trustee Believes the Value Is Higher

If after all this, the trustee believes that the item is worth more than you disclosed, here’s what may happen:

1. The allowed property exemption amount may still exceed and cover the trustee’s value. Then the trustee still has no right to the item.

2. You and your lawyer usually have the right to change the assigned exemption if there is one that covers it better. If one or two items are worth more than you expected, sometimes your lawyer can come up with a different set of exemptions that are now better for you.

3. The trustee’s increased value may be larger than the exemption but still not large enough to be worthwhile for the trustee to liquidate. The trustee would have to pay you the exempt portion if it took and sold the item. Only the amount in excess of that would be available for the trustee to distribute to your creditors. For reasons outlined in our last blog post, there are practical reasons why a trustee may simply not bother to do so.

4. If after all this the trustee and you are still in disagreement about value, the bankruptcy judge can decide the matter. He or she would weigh the evidence and come to a determination about the value. Usually it doesn’t come to this, because it’s a relatively expensive way to decide the matter.

Conclusion

The value you give to your assets is usually accepted as accurate. But your Chapter 7 trustee can get other information to challenge your valuation. Sometimes that can result in the trustee wanting to take something from you that you thought was exempt. Work carefully with your bankruptcy lawyer when preparing your asset and exemption schedules to prevent such problems.

 

Rents and Profits as Bankruptcy Assets

December 7th, 2016 at 8:00 am

Beyond considering whether your assets have net value on the date of filing, do they generate rents, profits, or proceeds afterwards?

 

Bankruptcy Assets and Timing of Filing

Our last four blog posts have been about special kinds of assets with special rules in bankruptcy. Those rules are often exceptions to the general rule that looks at your assets as of the day you file your bankruptcy case.

These asset-timing issues are very important, especially in Chapter 7 “straight bankruptcy.” That’s because you need to know whether you can keep everything you own as you get your fresh financial start. Usually you can keep everything, because it’s all protected by property “exemptions.” But you have to know what the law considered to be your assets in order to determine whether there are exemptions that cover them.

Today we take on another important exception to the assets-as-of-the-date-of-filing general rule.

Fair Market Value

You and your bankruptcy lawyer list the values of your assets in the “schedules” filed with the bankruptcy court. Usually the valuation standard is “fair market value.” What could you fairly get for the asset in an appropriate market for that kind of asset?  

That’s why it’s appropriate usually to use “garage sale” prices on stuff you could only sell in a garage sale-like setting. Consider the type of asset and the “market” you could realistically sell it in, and what sale price it would generate.

Business and Investment Assets

In many situations assets used in a business or investment have little or no net fair market value. Or they have little or no net value, or equity, which is what counts. (The secured creditor or lessor comes ahead of the bankruptcy trustee and your unsecured creditors.)

If you operated a business, all or most of its equipment may be borrowed against or leased, with no equity. Even your business supplies, inventory, and earned receivables are often collateral on a bank or SBA loan.  Whatever small equity you may have often fits within an exemption. Whatever assets are not secured against a debt may not be worth much and so can also be exempt.

Similarly, if the business is still operating its total value could easily be less than the debt against it.

Same thing with investment property, like a rental home you own. It may well be underwater—leveraged so that there’s no equity. Or it has no practical equity because the costs of selling it would eat up whatever equity it may have. Or possibly the bit of net proceeds could be exempt. Or the potential non-exempt proceeds may be small enough for a trustee not to bother with it.

Rents and Profits

But your assets for bankruptcy purposes don’t just include the present value of your assets at the time of filing. They also include the subsequent “[p]roceeds, product, offspring, rents, or profits of or from” those assets. Section 541(a)(6) of U.S. Bankruptcy Code.

This means that even if an asset has little or no present value, a trustee may still be interested in it because of the rents and profits it could generate.

Rental Property

Consider rental real estate you own that clearly has no equity, but you have a renter paying rent. You may think this asset is safe from the bankruptcy trustee and your unsecured creditors. But even if the trustee agrees that there’s no equity, the stream of rental payments is property that is subject to turnover to the trustee on behalf of your creditors. The exception is if those rental payments are considered part of the collateral secured by the mortgage holder. Talk with your bankruptcy lawyer about how to protect that income stream either way.

A Closed Business with Incoming Receivables

After closing your business you may have nothing of value for the bankruptcy trustee in equipment or inventory. Or you may have some tangible leftover business asset that you are happy to get rid of. But don’t forget the receivables—ongoing profits that continue to be paid to you. That stream of income, as modest or significant as it may be, is an asset that the trustee can claim for your general creditors. Again, that is true to the extent that income is not collateral of a secured creditor or can’t be exempted.

An Operating Business

One of the problems with filing a Chapter 7 case while owning a business that is still operating is this issue of ongoing profits and proceeds from the business. Even if the business has no net value because of the debts against it, the receivables and other forms of profit are subject to turnover to a bankruptcy trustee. That’s why Chapter 13 is usually the better solution with an ongoing sole proprietor business. And a Chapter 11 may be with a corporation or limited liability company (LLC).

The Exception for Earnings from Services

To be clear, the assets of your Chapter 7 bankruptcy case do NOT include the proceeds of your labor done AFTER you file your bankruptcy case. The Bankruptcy Code explicitly excludes “earnings from services performed by an individual debtor after the commencement of the case.” Section 541(a)(6).

So, the ongoing proceeds and profits of your business or rental property ARE at potential risk. Your personal income from your labor after your Chapter 7 case is filed is not.

 

“Pre-Petition” and “Post-Petition” Assets in Chapter 7

November 9th, 2016 at 8:00 am

Pre-petition assets are “property of the bankruptcy estate,” part of your Chapter 7 case. Post-petition assets are not.

 

Chapter 7 Timing

In our last blog we talked about the importance of the timing of your Chapter 7 “straight bankruptcy” case filing. We looked specifically at “pre-petition” vs. “post-petition” debts. Pre-petition debts are those that existed at time of your bankruptcy filing and so are included in the case. Post-petition debts did not exist until after filing and so are not included.

There is a similar distinction between your pre-petition and post-petition assets.

Pick a Point in Time

A Chapter 7 bankruptcy case is a financial snapshot in time. The bankruptcy system has to pick a specific time to look at your financial life, including your assets, your property. That point in time is the moment you file your case.  

“Property of the Estate”

That filing of your Chapter 7 case creates a bankruptcy “estate.” Think of this estate as a temporary legal person related to but separate from you. Everything you own at that point temporarily belongs to your bankruptcy estate.

So, pretty much everything you own pre-petition is “property of the estate.” Anything you earn or otherwise becomes yours after filing the case—post-petition—is not “property of the estate.”

You generally don’t actually lose possession of anything. The titles to your home or vehicle are not transferred. On the surface usually nothing changes. But legalistically your Chapter 7 trustee gains some potential control over your bankruptcy estate.

Exempt Property

In most Chapter 7 consumer cases the trustee never takes physical control over any of your assets. That’s because everything the debtor owns at the time of filing is “exempt”—protected from the trustee. That is, all of the property of the estate is exempt. It all fits within “exemptions”—categories of protected assets, and is all worth no more than the allowed dollar limits within each category.  

For example, you have a vehicle worth $10,000, with a debt of $7,500, and so equity of $2,500. Assume that in your state your vehicle exemption is $3,000. All of that equity is exempt, and so you can keep the vehicle; the trustee has no right to it. (Vehicle and other exemptions vary from state to state. And you’d need to keep paying the vehicle lender to satisfy its lien.)

“No Asset” Chapter 7 Case

If everything is exempt, then, usually about a month after you and your bankruptcy lawyer file your case, your Chapter 7 trustee will announce that he or she has no legal interest in anything in your bankruptcy estate. This usually (but not always) happens at the “meeting of creditors.” (A 5-10 minute meeting with the trustee you attend with your lawyer.) The trustee usually declares, verbally or in writing or both, that the case is a “no asset” case. This means that the bankruptcy estate contains no available assets because everything is protected by the available exemptions.

“Asset” Chapter 7 Case

If your bankruptcy estate contains something that isn’t covered by an exemption, the trustee has the right to take that from you. The trustee usually will, but may choose not to do so, depending on a number of factors. For example, something may cost too much to take possession of and sell compared to the anticipated proceeds.

Assuming the trustee does want a non-exempt asset, you’ll either surrender it to the trustee or have your lawyer negotiate term for you to keep the asset. You would pay the trustee for the right to keep it.

Again, non-exempt assets occur in a minority of cases. And if you’ve been upfront with your lawyer about everything you own, this will not be a surprise to you.

After the trustee takes and sells your non-exempt asset or in effect sells it to you, her or she then pays the proceeds to your creditors.  

Post-Petition Assets

Because post-petition assets are not in existence when you file your case, they are not property of your bankruptcy estate. The trustee has no control over or right to them.

Post-petition assets include a paycheck EARNED and received after your bankruptcy filing.  A paycheck earned BEFORE filing and not paid to you until afterwards is part of your bankruptcy estate. However, that paycheck may, as is often the case, be exempt and protected.

Post-petition assets also include gifts given to your after filing.

They include anything you purchase after filing, using money that’s either exempt or was earned post-petition.

Assets Received Post-Petition but Still Legally Pre-Petition

But careful about assets that you have a legal right to at the time of filing but do not get possession of until after filing. These are usually considered pre-petition assets and are included in your Chapter 7 case. Common examples include:

  • Tax refunds for tax years completed as of the time of filing, even if only paid to you later
  • Insurance proceeds for an accident or other incident that occurred before filing but only paid to you after filing
  • Litigation proceeds for a claim that existed pre-petition
  • Payment on a debt owed to you pre-petition but paid to you post-petition

Remember: such assets are property of your bankruptcy estate but often can be fully, or at least partly, protected through exemptions.

 

Debts Partly Paid but then Written off in Chapter 7

August 5th, 2016 at 7:00 am

If you have an “asset” Chapter 7 case, some or all of your debts are partially paid, with most or all of the remaining amounts written off.  

 

Our last blog post was about what happens to “general unsecured” debts in a straightforward Chapter 7 “straight bankruptcy” case. This type of debts is usually “discharged”—legally permanently written off—without you needing to pay anything on them.

But under some circumstances a PORTION of those run-of-the-mill debts DO need to be paid in a Chapter 7 case. Understanding how this works will help you decide between doing a Chapter 7 case or instead a Chapter 13 “adjustment of debts” one.

Property Exemptions and Chapter 7 “Asset Cases”

When consumers file a Chapter 7 case, most of the time they get to keep everything they own. That’s especially true when they are represented by an experienced bankruptcy lawyer. The reason they can keep everything is that everything they own is protected by property exemptions.

Property exemptions are legal protections of your assets, usually expressed in maximum dollar amounts for each set of assets. For example, you can usually protect a certain amount of equity in your home through a homestead exemption, a certain value in a vehicle through a vehicle exemption, etc. These property exemptions differ from state to state, often significantly.

What happens if you own an asset that is not exempt? The Chapter 7 trustee has the option of taking it from you, selling it, and distributing the proceeds among your creditors. That doesn’t always happen. If the asset has little value, or is not worth the effort for some other reason, the trustee can decide to abandon it. (See Section 554 of the Bankruptcy Code.)

If a Chapter 7 trustee DOES NOT take possession of any assets, the case is called a “no asset case.” If the trustee DOES take possession of assets to sell, it’s called an “asset case.”

Let’s look at two examples of Chapter 7 “asset cases.”

“Asset Case” Example

In the first example let’s assume that based on your income and other factors you qualify for Chapter 7 bankruptcy. You owe $100,000 in a combination of credit cards, medical bills, and personal loans. These very likely all fall into the category of “general unsecured” debts. You have no other debts.

Assume also that just about everything you own is protected by property exemptions. Except that you own a boat worth $5,000. It used to be important to you but is now more of a bother considering what it costs to maintain. Assume that it’s not protected by a property exemption.

In the Chapter 7 case you would give the trustee the boat, who would sell it, say, for $5,000. Let’s say the trustee had to spend $500 in expenses—for advertising the sale, and boat moving and storage fees. The trustee also gets paid, with court approval, a maximum of 25% of the amount disbursed to creditors. (It’s actually 25% on only the first $5,000 disbursed, and then a sliding scale of lower percentages as the amount disbursed increases. See Section 326 of the Bankruptcy Code.)

Here the amount for the trustee is $900, leaving $3,600 for the creditors. The trustee pays out that $3,600 proportionately to the $100,000 in debts. So your creditors would receive 3.6 cents for each dollar owed. And the remaining balances on all the debts would be completely discharged.

“Priority” Debt Example

In the second example take the same facts but add one more debt—$4,000 owed in last year’s income taxes to the IRS. That is a “priority” debt, one that bankruptcy law says the trustee must pay in full before the “general unsecured” debts are paid anything.

So in this example the Chapter 7 trustee would sell the boat for $5,000, pay the $500 in expenses out of that and keep $900 in trustee fees. But now the remaining $3,600 would all go to the IRS, leaving nothing for the “general unsecured” debts.

Income taxes from last year cannot be discharged in bankruptcy, so you would owe the remaining unpaid portion of $400. ($4,000 minus $3,600 = $400.) But that’s a whole lot better than owing $4,000! You or your lawyer would contact the IRS to make payment arrangements, in small monthly payments if necessary.

And what happens to the $100,000 in “general unsecured” debts which received nothing from the boat proceeds? They are all discharged without you having to pay anything on them.

 

The Homestead Exemption Cap

March 4th, 2016 at 8:00 am

Bankruptcy law sets a maximum dollar amount of protection for your recently-bought home, but this really applies only to certain states.

 

Our last blog post a couple days ago was about protecting retirement funds in bankruptcy. Today’s is about protecting your home, specifically if you bought your home within the last few years.  

Property Exemption Laws

When you file a bankruptcy case, your assets are protected through a set of legal exemptions–a list of categories of assets usually with maximum dollar limits, which you can keep out of the reach of your creditors.

Each state has adopted a set of property exemptions. Federal bankruptcy law also contains its own set of exemptions. When filing bankruptcy in ANY state you may use the state exemptions, plus in some states you also have the option of using the federal set of exemptions instead. This blog post applies only if you are using your state’s exemptions, and in particular applies to your state’s homestead exemption.

The Homestead Exemption

Almost every state has a homestead exemption, protecting their residents’ homes and/or home equity. The homestead exemptions vary widely state to state in how much home value or equity they protect.

At the low end, the Kentucky and Tennessee homestead exemptions protect only $5,000 in value or equity for an individual homeowner.

At the opposite end, the Montana exemption is $250,000, Minnesota’s is $390,000, Rhode Island’s and Massachusetts’s are $500,000, and Nevada’s is $550,000.

Also, the following states have homestead exemptions with no dollar limit (although some have acreage or other limitations): Texas, Oklahoma, Arkansas (if married or head of household), Kansas, Iowa, South Dakota, and Florida.

The Federal Cap on the State Homestead Exemption

As we said at the beginning, under certain circumstances federal bankruptcy law caps the dollar amount of state homestead exemption if you bought the home recently.

The purpose of this cap is to prevent people from moving from a small homestead exemption state and buying a home in a state with a very large or unlimited state homestead exemption in order to shield their assets from their creditors. It also may prevent some long-time residents of these same large exemption states from converting other assets into expensive homes, again shielding those assets from their creditors leading up to filing bankruptcy.

This federal cap on homestead exemptions is $155,675 (increasing to $160,375 on April 1, 2016).

Applicable to High and Unlimited Homestead Exemption States

The relatively large dollar amount of this cap makes it irrelevant to the residents of many states.

This cap will only affect you if your state’s homestead exemption is larger than this cap. That’s true only for the 12 states mentioned above which have either large homestead exemptions (Montana, Minnesota, Rhode Island, Massachusetts and Nevada) or unlimited homestead exemptions (Texas, Oklahoma, Arkansas, Kansas, Iowa, South Dakota, and Florida).

Only Applicable to Relatively Recent Home Purchases

This homestead exemption cap doesn’t kick in unless you bought the home at issue within the 3-years-and-4-months period before filing bankruptcy (within 1,215 days before, to be precise).

And even if you did, the cap doesn’t apply if the equity in the home you bought came from the sale proceeds of another “principal residence” within the same state, which had been purchased before that 3-years-and-4-month period.

The point of these conditions is to cap the large homestead exemptions only for relatively short term residents, or those sinking other money into expensive homes. It’s not designed to prevent those who bought their home more than 1,215 days earlier from using the full state homestead exemption. And it’s not designed for those who bought within that time period but did so by using equity from a prior home bought in that same state before that time period.

 

Upcoming Increase in Federal Property Exemptions

February 26th, 2016 at 8:00 am

The federal exemptions are nudging up about 3%. But that only matters if you are allowed to use them, and are higher than your state ones.

 

States with Access to the Federal Exemptions

This blog post is not for everyone. It’s only for the residents of 19 states—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, and the District of Columbia. It’s also for anybody who’s moved within the last 2 years from any of these places.

What makes these residents special is that they have the option of using a set of federal property exemptions to protect their assets when filing bankruptcy (instead of their state exemptions). And those federal exemptions are nudging higher as of April 1, 2016.

What Makes These States So Special?

If bankruptcy is a matter of federal law under the U.S. Constitution, why can’t the residents of the rest of the states use the federal property exemptions? Why are they stuck with their state’s set of property exemptions, which in some cases are much lower than the federal exemptions?

The reason is that the residents of those other states are the victims of a compromise made in bankruptcy law between federal power and states’ rights. This compromise allows each state to dictate that their residents must use that state’s set of property exemptions when filing bankruptcy, and can’t use the federal ones. The 31 states not listed above have so dictated.

Does It Really Matter?

We said that state exemptions can be much lower than the federal ones. In situations where that’s true, it can hurt a lot not to be able to use the federal exemptions.

Take the homestead exemption (in Section 522(d)(1) of the Bankruptcy Code). The federal homestead exemption is $22,975 before April 1, 2016, and is $23,675 on and after that day. (It’s double those amount for a married couple jointly owning a home.)

If you individually owe a home worth $200,000 with a mortgage of $180,000, your equity of $20,000 would be fully protected by the federal homestead exemption. That’s because the $22,975/$23,675 exemption amount is larger than and covers the entire amount of the $20,000 equity. But that would only work this way if you live in one of the above 19 states in which debtors are able to use the federal exemptions.

Take the state of Kentucky. The state homestead exemption is much lower than the federal one. It’s only $5,000 for an individual (double that for a couple). That would be way too low to protect $20,000 in home equity.

But because Kentucky allows its residents to use EITHER the state OR federal sets of exemptions, you could choose the federal exemptions and fully protect the $20,000 in equity.

However, if you were instead a resident of the state next door to the east, Virginia, the situation would be completely different. Virginia also has a $5,000 homestead exemption (double that for a couple). But it has chosen NOT to allow its residents to use the federal set of exemptions. So the higher federal homestead exemption is not available.

When It Doesn’t Matter

There are quite a few states which, like Virginia, do not allow the use of the federal exemptions but have higher state exemption amounts, at least in the particular exemptions that count in a particular situation.

Utah, for example, requires its residents to use its state exemptions, and not the federal ones. But its homestead exemption is $30,000 (double that for a married couple). So $20,000 in home equity would be fully covered.

West Virginia, with $25,000 for an individual’s homestead exemption, and Colorado, with $60,000, also require use of its state exemptions. But their homestead exemptions are higher than the federal one so in that respect it doesn’t hurt.

Can’t Pick and Choose Among Different Federal and State Exemptions

We’ve just been focusing here on the homestead exemption, and comparing the federal and state amounts. But you may not even own a home and of course you own other things other than a home. So there are within the state and federal exemptions different exemptions to cover different types of assets. To illustrate, here’s a list of many of the federal exemptions (with their before-April 1, 2016 amounts and their starting-April 1 amounts):

  • homestead, increasing from $22,975 to $23,675
  • motor vehicle, from $3,675 to $3,775
  • household goods and clothing, from $575 to $600 “in  any particular item,” from $12,250 to $12,625 “in aggregate value”
  • jewelry, from $1,550 to $1,600
  • “any property,” from $1,225 to $1,250, plus from $11,500 to $11,850 to the extent of any unused homestead exemption
  • tools of trade, from $2,300 to $2,375
  • personal bodily injury claim, from $22,975 to $23,675

If you are filing bankruptcy in a state where you have a choice between that state’s exemptions and this federal set, you have to look at all your assets and see which set of exemptions covers all your assets better.

 

More New Bankruptcy Dollar Amounts Effective Soon

February 24th, 2016 at 8:00 am

Here are the rest of the important changes affecting Chapter 7 and Chapter 13 bankruptcy cases filed on or after April 1, 2016.

 

Our last blog post a couple days ago described how every 3 years many of the dollar amounts within the bankruptcy laws are adjusted for inflation. The next set of these adjustments will be effective April 1, 2016. The changes don’t apply to ongoing bankruptcy cases but only to new ones filed on or after that date.

The upward adjustments are relatively small, reflecting a 3% or so increase in the consumer price index over the last 3 years. But because these changes affect so many aspects of consumer bankruptcy, they are worth noting.

Our last blog post described a couple of the increased amounts. Here are the rest that are worth your attention. (You can see the entire list as just published by the federal Judicial Conference .

Maximum IRA Exemption

In general, retirement funds are exempt (protected for you from your creditors) when you file a bankruptcy case. However, there is a cap on money that you can exempt in traditional individual retirement accounts (IRAs). The relatively high cap started out in 2005 at $1,000,000. Through inflation that cap will now be at $1,283,025. (Section 522(n) of the Bankruptcy Code.)

This cap does NOT apply to either “SEP IRAs” (Simplified Employee Pensions) or “simple IRAs” (Savings Incentive Match PLans for Employees).

A Limit on Recently-Acquired Homestead Exemption

If you live in or are considering moving to a state with a very high or unlimited homestead exemption (Massachusetts, Texas, and Florida, for example), you could be limited in how much of your state’s homestead exemption you could use. This limit only applies if you acquired the property in the 1,215-day period before filing bankruptcy. If so, the state homestead exemption limit is being increased from $155,675 to $160,375. (Section 522(p)). Since most state’s homestead exemptions are lower than this new limit, only homeowners filing bankruptcy in very high or unlimited homestead exemption states are affected by this increase.

Chapter 7 “Means Test” Calculation

The Bankruptcy Code’s “means test” contains a rather complicated formula for determining whether there is a “presumption of abuse” when a person files a Chapter 7 “straight bankruptcy” case. The purpose of this formula is to help determine whether you have the “means” to pay a meaningful portion of your debts within a Chapter 13 payment plan. If the formula says that you do have the “means” to do so then you are said to be “presumed” to be abusing the bankruptcy law if you are filing a Chapter 7 case.

This formula includes elements like your “disposable income” (your income minus allowed expenses) and the amount of your unsecured debts. It also includes some specific dollar amounts.

It’s these specific dollar amounts that are being increased. We’ll explain how this works in an upcoming blog post. For now know that the result is that in some circumstances you can have a little more disposable income and still qualify for Chapter 7. (Sections 707(b)(2)(A)(i)(I & II) and 707(b)(2)(B)(iv)(I & II).)

Chapter 13 Debt Limits

You can have an unlimited amount of debt when you file a Chapter 7 bankruptcy. But there are debt limits when filing a Chapter 13 “adjustment of debts for an individual with regular income.”

There are separate maximum amounts of unsecured debts and secured debts. Having too much of either type of debt disqualifies you from Chapter 13. The unsecured debt limit is increasing from $383,175 to $394,725 and for secured debt is increasing from $1,149,525 to $1,184,200. (Section 109(e) of the Bankruptcy Code.)

Length of Chapter 13 Plan

Whether your plan is obligated to last 3 years or instead 5 years turns on the comparison of your “current monthly income” with the published “median family income” amounts for your size of family in your state.

These published “median family income” amounts only include household sizes of from 1 to 4 individuals. For larger households, you add a stated dollar amount for each additional individual in the household to come up with the appropriate “median family income” for the household. This monthly additional dollar amount per additional household member is increasing from $675 to $700 per person. (Sections 1322(d) and 1325(b).)

Priority Debts for Wages and Benefits

Assume that you are not filing bankruptcy yourself but your employer is. You’re owed wages and employee benefits for work you did.

The bankruptcy law favors you by making the employer’s debts to you for unpaid wages and benefits “priority” debts. “Priority” debts must be paid in full by the debtor before other “general unsecured” debts are paid anything.

There are certain conditions to meet for wage and benefits debts to have this favored “priority” status. One of those conditions is a maximum amount that a wage or benefits debt can be “priority.” (Sections 507(a)(4) and (5).)

That maximum for “priority” wages is going up from $12,475 to $12,850. There is a separate and identical maximum for unpaid benefits payments by your employer, which is also increasing to the same $12,850 amount.

Next…

In the next several blogs we will more fully explain how these upward adjusted amounts work to potentially affect your bankruptcy case.  

 

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