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Category: Bankruptcy Information
Posted by emsc on June 30th, 2014 in Bankruptcy Information
Starting an Individual Retirement Account, or IRA, is pretty easy. You can call a financial adviser, or even do it online. You can avoid paying tax on the money when you contribute it (in a traditional IRA) or when you withdraw it (in a Roth IRA).
IRAs are usually well-protected in bankruptcy, subject to some rules about when they were first funded and how recently. For instance, if you file for bankruptcy tomorrow, and last week you transferred $50,000 into the IRA, you may have problems. Talk to a bankruptcy lawyer before you transfer any assets and to determine when if at all you may plan to file a bankruptcy in the future.
The good news as we mentioned is that IRAs are broadly protected. The bad news is that a recent decision of the US Supreme Court tells courts that you cannot exempt an IRA you inherited from someone else (like a parent) through the traditional exemptions that protect your assets from creditors.
The case that decided it, called Clark v. Rameker, came out of Wisconsin. The courts had a difficult time balancing what retirement and tax laws said versus what the bankruptcy laws say. There wasn’t a clear cut answer. But the Supreme Court has decided. So unless Congress (or the state legislatures) change the exemptions, we need to know if the IRA you may have was one you started or if you inherited it. That way we can best advise you.
If you’re contemplating a bankruptcy and have a retirement account, don’t be surprised if we ask you for more details. The more information we have, the better we can assist you. Please call us at Lakelaw (847-249-9100 in Illinois, 262-694-7300 in Wisconsin) or visit our website at www.lakelaw.com to arrange a free consultation and discuss what assets can be protected from creditors in bankruptcy.
There are times when a person may be found to owe another person money. Usually one party sues another over a promissory note or a charge card. After a court proceeding, if the Court finds that the debt is valid, the Court grants a judgment in favor of the creditor.
One way the Judgment Creditor can try to collect is by filing a Citation to Discover Assets with the Court and serving the Judgment Debtor. The Judgment Debtor can be taken to court and asked about any and all assets that he has that can be used to satisfy the judgment. Once a Judgment Debtor is served with the Citation, he cannot sell, transfer, or dispose of his property until the Judgment Creditor has a chance to inquire about the assets. The Citation acts to freeze the assets of the Judgment Debtor.
The Judgment Creditor may issue a similar Citation to Discover Assets upon a third party not part of the original dispute, in order to determine if the third party has assets of the Judgment Debtor. If, for example, a bank has the Judgment Debtor’s money in an account, the bank can be prevented from releasing any funds out of that account. The Judgment Debtor will know when the Judgment Creditor contacts the third party as a copy of the Third Party Citation to Discover Assets is mailed to Judgment Debtor.
Depending on what is discovered in the post-judgment Citation hearing(s), the Judgment Creditor may be able to reach the Judgment Debtor’s bank account, seize non-exempt assets, and even garnish wages in order to satisfy the amount of the judgment that remains due and owed. The Judgment Debtor may be able to work out a payment arrangement with the Judgment Creditor. Obtaining legal assistance is advisable as soon as possible. Some Judgment Creditors may be willing to compromise on the amount owed, because the Judgment Debtor may have the option of seeking bankruptcy protection. If the Judgment Debtor qualifies for a Chapter 7 discharge, the Judgment Creditor could receive nothing.
At Lakelaw, we have filed a joint bankruptcy petition for a same-sex couple. We had a couple we’ll call Daniel and Anthony. The couple married in a state that permits same-sex marriage, since their home state, Wisconsin, does not. Still, we filed the bankruptcy for them as a couple instead of filing separate bankruptcy petitions and consolidating (linking them together). Thus far, the case has been a success and has met no objection from the Chapter 13 Trustee or United States Trustee.
With news this weekend that the Attorney General of the US will recognize same-sex marriage and expand the benefits for lawful same-sex marriages nationwide (link to http://www.cnn.com/2014/02/08/politics/holder-same-sex-marriage-rights/), this process will soon be even easier for thousands of same-sex couples in marriages from around the nation. .
Illinois is one of the 16 states that already recognizes same-sex marriage. So a joint bankruptcy petition for a lawfully married couple regardless of their sexual orientation should not be a problem, as long as the couple meets the other requirements of the chapter of bankruptcy they seek. It’s a good idea to speak with an attorney before filing to discuss those requirements from the bankruptcy code.
We predict more states, even those like Wisconsin that do not recognize gay marriage, will see many more joint bankruptcy petitions from gay and lesbian married couples. The new threshold question won’t be “are you in a marriage defined as a man and a woman?” but “is your marriage ‘lawful’?” As more and more states permit same-sex marriage, the answer that question will more and more be yes.
The changes don’t just impact bankruptcy. The changes mean that spouses in same sex marriage get federal survivorship benefits and don’t have to testify against one another in a criminal trial. But one of the biggest impacts will be the ability to go hand-in-hand toward financial relief by filing bankruptcy together.
As an attorney who’s been practicing in consumer bankruptcy for five years now (in Illinois and Wisconsin), it’s heartbreaking and frustrating to see the huge amount of lies and misinformation about bankruptcy.
Some of these mistakes come from gossip or bad experiences in bankruptcy (including lying, bad attorneys, or other frustrations). Others come from rumors spread by the financial services industry to try to keep people out of bankruptcy (even though lenders can write off the uncollectable debt and take a tax break for it). Even worse are errors from hacks – er, attorneys/writers – who blatantly skew statistics and facts about bankruptcy filings for their own purposes. We can assure you that while nothing is ever certain with the law, the overwhelming majority of bankruptcies are successful, peaceful, and bring financial relief to our clients.
Here are some common statements about bankruptcy and the truth.
Statement 1: Why not just settle debt? It’ll be better for your credit report and you won’t have to pay a lawyer to settle debts for 40-50 cents on the dollar.
Answer: If your sole major debt is a $4,000 credit card and you can afford to pay a lump sum of $2,000, a credit card company may take it and waive the rest. To do so, you’ll have to show you have a serious hardship (not just because you don’t feel like paying) and submit financial records to prove it. You’ll also have to come up with a lump sum or a few significant payments, not a long term payment plan. Unless you’re insolvent, you’ll have to pay tax on the forgiven debt. But in the situation above, that’s fine because bankruptcy’s costs for a lawyer and the filing fees would make a bankruptcy unnecessary. Where bankruptcy absolutely becomes necessary is if you are in the same financial situation but have $50,000 worth of credit card debt and medical bills.
Even if you get every card or hospital to settle for 10 cents on the dollar (an unrealistic goal for most clients), and even if you can avoid the tax on the 1099 for the forgiven debt, that’s still at least 2-3 times what you’d pay for a bankruptcy to discharge the debt altogether. With so much debt, settlement is not only unrealistic, but it costs significantly more than a bankruptcy filing. For an attorney not to disclose that is tantamount to malpractice.
2. You cannot discharge student loans in bankruptcy.
Answer: This is another major misstatement, largely perpetrated by student loan lenders. In order to discharge student loans, there is a very high standard (possibly relaxed by a recent decision in the 7th Circuit Court of Appeals for Illinois/Indiana/Wisconsin) where you have to demonstrate a good faith attempt to make payments and a serious reason why it’s impossible to pay anything back. Essentially the situation is for people who are unable to earn a significant income, will likely never have the means to do so, leaving the possibility of repayment fruitless. That’s a high standard for sure, but it’s by no means impossible. (Think a 60 year old disabled person with only $700 per month in social security/disability coming in, with expenses of $1000 per month and $60,000 of outstanding student loans). With or without an attorney, people have successfully discharged significant private and government-backed student loan debt.
3. I want to file bankruptcy, but if I do, I’ll lose my (car, boat, beagles, RV, bank account, retirement accounts, etc.)
This aggravates me this most because it assumes that the point of bankruptcy is to take everything from the debtor. The exact opposite is true: an honest but unfortunate debtor gets a fresh start (in Chapter 7, or a repayment plan in Chapter 13) in exchange for listing, valuing and exempting assets. Every state has a scheme of exemptions (with some, like Wisconsin, allowing federal exemptions, while others, like Illinois, do not). The easiest way to find out what you can maintain: Talk to a competent bankruptcy lawyer. Call us at Lakelaw or e-mail us. Even if we don’t practice in your jurisdiction, we can refer you to a qualified consumer attorney in another area. You’ll be surprised, but typically 90% of Chapter 7 cases or so are no-asset 7 cases where the filing debtor turns over nothing.
The moral of this story: Speak with an attorney and learn the truth before believing what people write and say to scare people away from bankruptcy. It may not be for everyone, but for most debtors, it’s a huge relief and worthwhile decision.
When a bankruptcy is filed, any schedules and statements that aren’t filed with the basic paperwork are due within 14 days from the case filing. For almost everyone, that is plenty of time to gather paperwork, meet with an attorney, and get the rest of the documents in. The Court may extend the deadline on a motion by the debtor under Rule 1007, but it doesn’t automatically have to grant it. The Court needs “cause”. One judge in the Eastern District of Wisconsin has strongly suggested he won’t grant “boilerplate” motions without support.
Judge Halfenger’s decision in the Brown case expressed frustration when the motion simply stated the debtor was “gathering documentation”. There was no affidavit or explanation why the motion was filed on the very last day with no affidavit or support. In plain English, explain why 14 days is not enough, or the Judge may simply say it’s too late and dismiss the case for failure to file required documents.
Don’t let your case get dismissed. File your schedules on time or have a very good reason why not. Speak to a Lakelaw attorney to determine what falls under “cause” to extend the time frame.
EdVest accounts are 529 College Savings Plans offered in Wisconsin. These accounts, like any other account, are considered assets in a bankruptcy. There are two ways to protect the value in these accounts:
1. Use the wild card exemption offered by the Federal statutes (up to around $11,000)
2. Use the state law exemption in Section 815.18(3)(p) of the Wisconsin Statues
These might seem to solve the problem, but they don’t. This is because a decision out of the Western District of Wisconsin called In re Bronk held that a debtor in bankruptcy cannot exempt the value in an EdVest account using the Wisconsin 815.18 exemption. The District Court in the Western District agreed, and that case is up on appeal right now to the 7th Circuit Court of Appeals in Chicago.
However, a recent case out of Milwaukee’s Eastern District of Wisconsin Bankruptcy Court disagrees with Bronk. In the case of In re Eckerman, Chief Judge Pamela Pepper held that a proper reading of the statute allows for the state protection for a debtor’s contributions to the EdVest Account.
This matter will probably be pursued on appeal in both cases before a final decision is issued. To be safe, stay tuned and be warned if you plan on using EdVest accounts to protect cash in the event of a bankruptcy filing.
A few years ago, the US Supreme Court decided a case called United Student Aid Funds, Inc. v. Espinosa. The decision held that even when a Chapter 13 plan violates the Bankruptcy Code, the creditor must object within a set time or else they won’t get to object later, when the bankruptcy is done. Apparently creditors still haven’t learned.
In a recent decision by Judge Kelley in the Eastern District of Wisconsin, the Court held that the creditor, American Family Mutual Insurance Company, was too late when it moved to reopen a long completed Chapter 13 to challenge an improper plan. Even though the case was completed before the Espinosa decision, the principle still applied.
Creditors who receive a Chapter 13 plan should ALWAYS review them. That is free advice from counsel for Chapter 13 debtors.
A recent decision in the Eastern District of Wisconsin educates us on the old – preferences – and the new – a novel defense. This will be helpful in both Chapter 7 and Chapter 13 cases.
First – what is a preference?
11 U.S.C. § 547(b) defines preferential transfers.
Section 547 provides that the trustee may avoid (or set aside) transfers of the debtor’s interest in property:
- to or for the benefit of a creditor;
- for or on account of an antecedent debt owed by the debtor before such transfer was made;
- made while the debtor was insolvent;
- made – (A) on or within 90 days before the date the petition was filed; or (B) if the creditor was an insider, on or within one year before the date the petition was filed; and
- that enabled the creditor to receive more than the creditor would have received if – (A) the case were a case under Chapter 7 of the Bankruptcy Code; (B) the transfer had not been made; and (C) the creditor received payment of such debt to the extent provided by the provisions of Chapter 7
How does this work in real life? Let’s take a recent example. This client did not file a Chapter 7 for the reasons below (as well as concerns about equity in her property).
Daughter borrows $20,000 from her father. This is treated as a loan, not a gift. There likely is no written contract, but payments are made regularly and are expected. Therefore, father is a creditor. Prongs 1 and 2 are satisfied. Payments are made in the year before filing, so prong 4 is satisfied. The debtor, while she may have equity in assets, was still likely insolvent due to her high credit card debt, so prong 3 is satisfied. Prong 5 might be a question, because we don’t know what amount her father would have received from the trustee if she filed and held equity. Still, the odds were high that the father would have been sued by the trustee to recover the money she repaid him.
One defense to a preference payment is discussed in a case called In re Grisham.
The defense is called “the ordinary business defense”. How do we establish this?
First, the debt must be incurred in the ordinary course of business or financial affairs of the debtor and vendor. Second, the transfer must have been made in the ordinary course of business or financial affairs of the debtor and vendor. This element is often referenced as the “subjective” test to the ordinary course of business defense Third, the transfer must have been made according to ordinary course of business terms within the respective industry. This element is often referenced as the “objective” test of the ordinary course of business defense. See “In Defense of a Preference,” Business Credit, Sept., 2004, Pages 36-39
This case is important because it establishes that repayment of a personal loan to a family member could fall under the ordinary course defense. Both the Judge and trustee appeared surprised by the arguments of the debtor and the case law they provided. But the debtor ultimately lost because she couldn’t produce any evidence that the loans were in the ordinary course of her uncle’s business. Make no mistake, proving this defense is very difficult and rare. It isn’t often that both a debtor and their family member are both in the business of borrowing and repaying money.
The moral here is that sometimes there are defenses to these preferences. Talk to Lakelaw before filing about pre-filing transfers of money, repayments of loans, and we’ll see if we can argue against a turnover of the money.
I like to offer free initial consultations because I believe it’s only fair to know what your options are before paying for legal representation. I meet with many people who would benefit from Chapter 7 Bankruptcy relief. The only problem is that they are not eligible to file and get a discharge because they filed in late 2005, or 2006, or later.
The rules are very clear and simple: Measured from the date the prior bankruptcy was filed (not converted), a debtor must wait 8 years before filing another Chapter 7 bankruptcy and receiving a discharge.
Sure, there are other options available in the meantime – debt consolidation programs, Chapter 13 Bankrupty plans, Chapter 128.21 Debt Amortizations (for Wisconsin residents). These all require a steady income with disposable money to pay creditors. In this economy, not everyone has that.
My two cents: Meet with me (or another well-trained bankruptcy attorney) and look over your finances. If you make so little money you can’t be garnished, you may simply want to wait to file. If a small Chapter 13 plan payment is possible, that might work as well, but you should never file a Chapter 13 plan unless you know in good faith you can make it work. It’s simply too much time for you, an attorney, the court and trustee, not to mention money and a toll on the system. Also, you should never try to file a Chapter 13 bankruptcy and plan without an attorney – I was in court recently when a judge told a pro se debtor that she wouldn’t even file a bankruptcy without an attorney!
Still, there may be options available. Call us or e-mail us to discuss.
Most rulings come from state courts, not from federal courts. State courts hear all sorts of claims, from criminal claims to civil claims to foreclosures in “equity”.
We don’t always like the outcomes, and occasionally judges do make errors in their rulings or rule based on information that later turns out to be wrong. So what can we do in Bankruptcy Court about it?
The Rooker-Feldman doctrine, based on two Supreme Court cases, says federal court s (like bankruptcy courts) can’t sit as appellate courts for state court decisions we don’t like. If a trial court judge in the Circuit Court of Ozaukee County, Wisconsin rules against a client and says a foreclosure is proper, we can’t appeal that decision in Bankruptcy Court. It’s a final order and would have to be appealed in state court.
This is very important because many people look to not only file for bankruptcy, but also to ask the judge to avoid a mortgage or cancel a judgment that could turn into a non-dischargeable debt. In many cases, these decisions come when clients, who can’t afford to hire lawyers to investigate and defend them adequately, are held in default or easily lose in summary judgment.
This is why the first level is so important and why, if the client wants to fight their case in Bankruptcy Court, lawyers must make sure there isn’t a final judgment to try and set aside.
The moral of the story: Fight early or else you might not get to fight at all.
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