OBLIGATION TO DISCLOSE FINANCIAL AND INCOME CHANGES

On October 31, 2013, the appellate court for this region issued an important opinion concerning what is called "after acquired property."  For some time, the status of "after acquired property" has been in limbo.  The Bankruptcy Code treats chapter 7s and 13s differently.  While it is clear that assets from property settlement agreements and inheritances acquired within 180 days of the bankruptcy petition are part of the bankruptcy estate for chapter 7 purposes, the status of such property was not clearly defined under chapter 13 proceedings.  Afterall, a chapter 13 bankruptcy lasts for 36 to 60 months.  The specific issue before the Court concerned an inheritance received by a chapter 13 debtor after month 6 but before the completion of his plan payments.  The Debtor did not disclose the inheritance to the chapter 13 trustee, and the latter sought the monetary value of the inheritance on behalf of the bankruptcy estate.  The Court of Appeals for the Fourth Circuit held that property acquired after 6 months but before the completion of the plan is part of the bankruptcy estate.  More importantly, some of the language employed by the Court in its opinion is very expansive.  In essense any windfall to the chapter 13 debtor or any large salary increase ought to be disclosed to the chapter 13 trustee seasonably.  The Fourth Circuit states that a chapter 13 bankruptcy is very advantageous to the debtor and that the debtor ought to pay his creditors if he can do so.  The Code language will be interpreted accordingly. 

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.

ATTORNEY OBLIGATION TO DISCLOSE ASSETS TO COURT

An issue recently arose concerning an attorney's obligation to disclose to the bankruptcy estate that a client's parent died leaving her an inheritance within 180 days from the filing of the bankruptcy.  See a prior blog article.  11 U.S.C. section 541 provides:

Any interest in property that would have been property of the estate if such interest had been an interest of the debtor on the date of the filing of the petition, and that the debtor acquires or becomes entitled to acquire within 180 days after such date—

(A) by bequest, devise, or inheritance;
. . .

(C) as a beneficiary of a life insurance policy or of a death benefit plan.

We concluded under the applicable Rules of Professional Conduct, Va. Sup. Ct. Rules, Pt. 6, Sec 11, Rule 1:6, that we must disclose such an event to the court because (i) our failure to do so would result in a fraud upon the court, unless we immediately withdrew from representation, and (ii) the failure to turn over assets of the bankruptcy estate would amount to bankruptcy crime.

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.

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.