As part of the intake process, I always ask clients if they have a great aunt or uncle who is going to leave them $1,000,000. Invariably the answer is no. I do this to alert clients to the fact that any inheritance given or to which the debtor becomes entitled within 180 days of filing for bankruptcy is part of the bankruptcy estate. The trustees want me to give clients this information. It is the law after all.
Last week I had a client whose mother died within the 180 day period. Obviously, this was sad for the client. I think it is even sadder that her mother's assets are now being used to pay her daugther's creditors. With proper estate planning this result could have been avoided. In fact, good estate planning is important if one has many creditors. If a client is being is being pursued by creditors or even before that point, if potential claims can be made against the debtor, then the debtor ought to alert relatives that this is a possibility. In that case, a parent, for instance, can set up a testimentary trust with "spend thift" provisions. These types of provisions allow the trustee to avoid payments to the debtor that would result in attachments by creditors. There are exemptions under state law to protect spend thift provisions in trust documents. We have an estate planning department and would be happy to assist you to protect prospective inheritances.
This blog is not intended to render legal services to the reader, including advice about bankruptcy or taxes. Consult with a lawyer concerning the specific application of the law to your unique circumstance.
Wednesday, August 31, 2011
Sunday, August 28, 2011
401(K) AND IRAS NOT PART OF BANKRUPTCY ESTATE; PLAN TREATMENT
Many times, I will sheepishly ask individuals about their 401(K) and 403(B) plans and IRAs in an intake interview. I am happy when the client has saved much. Unfortunately, usually that is not the case. Typically clients raid their retirement plans to save their houses from foreclosure or to pay harrassing creditors. We should not do this. But if the world were perfect, I would not be employed.
For some reason, this information concerning retirement benefits and balances is required to be disclosed on Schedule B of the bankruptcy petition. The trustees always ask about retirement assets. It must be their curiosity. Section 541 explicitly states that such plans or accounts ARE NOT PART OF THE BANKRUPTCY ESTATE.
More importantly, Congress in 2005 explicitly allowed debtors in Chapter 13 plan to contribute to their retirements while in bankruptcy. Recently, we came across an appellate decision from the United States Court of Appeals for the Sixth Circuit (BTW, we are in the Fourth Circuit!) in which the debtor increased her payments to her retirement after filing for bankruptcy under chapter 13. The Court did not allow this. The debtor could maintain the contribution level she had prior to the bankruptcy filing, but could not increase her contributions afterwards.
The Sixth Circuit case suggests, if possible, one should establish a sustainble retirement contributions prior to filing for bankruptcy under chapter 13. Bankruptcy takes some planning, and for that reason, one should consult with counsel early in the process. There are many steps that one make take prior to filing, and these can't be done overnight.
This blog is not intended to render legal services to the reader, including advice about bankruptcy or taxes. Consult with a lawyer concerning the specific application of the law to your unique circumstances.
For some reason, this information concerning retirement benefits and balances is required to be disclosed on Schedule B of the bankruptcy petition. The trustees always ask about retirement assets. It must be their curiosity. Section 541 explicitly states that such plans or accounts ARE NOT PART OF THE BANKRUPTCY ESTATE.
More importantly, Congress in 2005 explicitly allowed debtors in Chapter 13 plan to contribute to their retirements while in bankruptcy. Recently, we came across an appellate decision from the United States Court of Appeals for the Sixth Circuit (BTW, we are in the Fourth Circuit!) in which the debtor increased her payments to her retirement after filing for bankruptcy under chapter 13. The Court did not allow this. The debtor could maintain the contribution level she had prior to the bankruptcy filing, but could not increase her contributions afterwards.
The Sixth Circuit case suggests, if possible, one should establish a sustainble retirement contributions prior to filing for bankruptcy under chapter 13. Bankruptcy takes some planning, and for that reason, one should consult with counsel early in the process. There are many steps that one make take prior to filing, and these can't be done overnight.
This blog is not intended to render legal services to the reader, including advice about bankruptcy or taxes. Consult with a lawyer concerning the specific application of the law to your unique circumstances.
CONVERSION FROM A CHAPTER 13 TO A CHAPTER ; NOT ALWAYS THAT SIMPLE
Recently, I had a client come into the office. She was disappointed with her current bankruptcy counsel. She had filed for a chapter 7 in 2002 and unfortunately recently received a divorce and therefore filed for a chapter 13 in 2010. A year later, she could no longer comply with her chapter 13 plan and was in default. Instead of modifying her plan payments downwards, which she is allowed to do, the debtor chose to convert her plan to a chapter 7. Her counsel filed the documents converting the case to one under chapter 7. It is not hard to do, the forms for this are in Best Case, the leading bankruptcy software. Anyway, she converted and filed the additional documents required and even attended the creditors' meeting. She thought everything was fine. Then the US Trustee's Office filed a motion to dismiss and a motion to disgorge the $750 the debtor paid her counsel for the conversion.
Why? The Bankruptcy Code provides that upon conversion, the converted chapter relates back to the filing date of the original filing. So what, you might ask? Well in this particular case, the debtor was ineligible to file a chapter 7 at the time she filed her chapter 13. One can only file a chapter 7, once in every 8 years. Therefore, the conversion was not successful and the client was very angry with her prior counsel. I explained that I would be very happy to refile her chapter 7, for which she is know eligible, but the bankruptcy code itself is fraught with hazards, and that perhaps counsel should be forgiven. She stated that the prior counsel refused to return her calls, etc. That is another matter entirely.
This blog is not intended to render legal services to the reader, including advice about bankruptcy or taxes. Consult with a lawyer concerning the specific application of the law to your unique circumstance.
Why? The Bankruptcy Code provides that upon conversion, the converted chapter relates back to the filing date of the original filing. So what, you might ask? Well in this particular case, the debtor was ineligible to file a chapter 7 at the time she filed her chapter 13. One can only file a chapter 7, once in every 8 years. Therefore, the conversion was not successful and the client was very angry with her prior counsel. I explained that I would be very happy to refile her chapter 7, for which she is know eligible, but the bankruptcy code itself is fraught with hazards, and that perhaps counsel should be forgiven. She stated that the prior counsel refused to return her calls, etc. That is another matter entirely.
This blog is not intended to render legal services to the reader, including advice about bankruptcy or taxes. Consult with a lawyer concerning the specific application of the law to your unique circumstance.
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