An insolvent estate has debts in excess of decedent’s assets. This means that not every debt can be paid in full. Pennsylvania law determines the order that debts are paid and, ultimately, the amount. Surviving spouses and children often worry about their responsibilities for debts that the estate cannot pay. Generally, this is not a problem. This is a brief overview of what usually happens and why.

Usually, a decedent’s creditors only can reach assets in the decedent’s estate. A number of assets are exempt from claims of creditors or are not part of the estate. Therefore, creditors cannot pursue these. Examples include a life-insurance policy owned by the decedent naming a beneficiary other than the decedent or the estate. In addition, property owned with someone else having the right of survivorship is not part of the estate. These usually are removed from the estate when determining its solvency.

Responsibilities of the Personal Representative

The estate’s personal representative – the executor when a Will is being probated or the administrator when there was no Will – determines if an insolvent estate is involved. This is done before paying debts or making distributions. An insolvent estate adds difficulty to the personal representative’s job. Since one of the first responsibilities being the payment of the deceased individual’s debts, the personal representative review all claims against the estate. Next, the order in which the creditors will be paid is determined. Gathering the estate’s assets to use  to make the payments is another crucial task.

The personal representative quickly learns if the estate is insolvent. If it is insolvent, this individual should not make distributions to heirs or beneficiaries. Doing so can lead to liability for debts that otherwise could have been paid.

Section 3392 – Classification of Debts & Priority of Payment

With an insolvent estate in Pennsylvania, you have to look to the law for guidance regarding payment of debts. Section 3392 of Title 20 of Pennsylvania’s Consolidated Statutes sets out classifications of various types of debts and the order in which these are paid.

While there are 7 categories listed in Section 3392 (“Classification and order of payment”), there is an additional one given preference over these. These are claims that the federal government may have for taxes owed to it. Generally, the phrase, “subject to any preference given by law,” gives top priority to federal tax debts subject to liens. As the personal representative of an estate, you must look for these before paying other debts. Otherwise, you could be responsible for paying the debts that have priority due to the mistake of paying debts of lower priority instead.

Section 3392 is important when there is an insolvent estate, but it applies to all estates. This is especially important since an estate that looks solvent may be viewed differently after all claims against the estate have surfaced. You cannot pay claims of a lower classification before all claims of higher classifications are paid in full. Also, with an insolvent estate, when you reach the classification at which there are not sufficient assets to pay all claims, you would make partial payment for each claim using the same proportion throughout that class. Any classes below this would have to go unpaid.

As for the classes themselves, the first category to be paid involves the costs of administration of the estate. This includes filing and related fees (such as advertising the estate). Other administrative costs that Pennsylvania gives top priority include legal fees and the personal representative’s compensation. Second in the list is the family exemption, which is cash or property with a value of up to $3,500 that can be claimed by a surviving spouse or children and parents of the decedent who resided in the decedent’s household.

After this, priority is given to funeral and burial costs as well as the cost of medicine used by the deceased person during the final 6 months of life. Medical, nursing, and hospital services during this period also are in this category, along with money for services provided by any employees of the decedent during these 6 months. The final part of this category are services provided by Medical Assistance in the last 6 months of life.

The fourth priority for payment is the cost of a grave marker. Then, priority is given to any rent owed for the decedent’s residence during the 6 months immediately prior to death.

Listing 5.1 (actually the sixth priority) involves claims made by Pennsylvania and its political subdivisions. Finally, there is a catchall category of all other debts and claims, which would include such items as credit-card debts solely in the decedent’s name. If there are sufficient assets in the estate, the personal representative should work to pay all of the above debts as soon as possible. Then, the assets that remain can be distributed to heirs or beneficiaries (depending on whether there is a valid Will).

Possible Liability of Third Parties for the Estate’s Debts

However, when an insolvent estate may exist, not all claims and debts can be paid from its assets. This can raise a question that is important to various parties interested in the estate: can someone other than the decedent be held responsible for debts that cannot be paid by the estate? The answer is a qualified “yes.”

Again, remember that executors and administrators can be responsible for debts in some circumstances. To avoid this, they cannot distribute assets from an insolvent estate since they face personal liability for the debts that cannot be paid as a result. A distribution from an apparently solvent estate is an “at-risk” distribution because there can be claims that become known after the distribution. An executor runs the risk of being responsible for paying any amount of a claim that the money received by the beneficiary could have paid. With “at-risk” distributions, a personal representative generally wants to be protected by an “indemnification agreement.” This means the recipient agrees to reimburse the estate if this is needed to pay its debts.

When faced with an insolvent estate, the personal representative often seeks the court’s protection before acting. In this situation, you should not consider paying debts of the insolvent estate unless you obtain court approval of a petition under Section 3392. This will prevent you from being held responsible for paying the debts personally.

There also are some situations when others can be held accountable for debts in the name of the deceased person. While creditors may have more incentive to pursue third parties in an insolvent estate, the debts may be enforceable under any circumstance. You always will be liable for a debt on which your name appears as a co-signer or guarantor. Charges that you made on a decedent’s credit card can leave you with responsibility for that debt.

As for spouses or children, liability usually follows a similar course. In other words, surviving spouses and children generally are not responsible for debts solely of the deceased spouse or parent. However, when both spouses sign a note for a loan, for example, the estate and the surviving spouse are liable for the debt, even if only one spouse received its benefits. Also, if a surviving spouse or child signed a contract as a guarantor when the decedent needed medical care, liability for any unpaid debt likely remains. An important point that runs throughout all of this is that creditors want to be paid and potentially will look at all possible sources when a decedent leaves an insolvent estate.

Debt Forgiveness and Income Tax

Debt forgiveness, which is the cancellation of a debt that you owe to someone, often can lead the IRS to see an increase in your income tax bill. However, there is no simple rule to be applied to every situation. For example, if you are in bankruptcy, the IRS is unlikely to see income that can be taxed after debt forgiveness. On the other hand, when a commercial lender cancels your obligation to repay a debt, you may find yourself with income equal to the amount of debt forgiven. In this situation, you do not have any money in hand, but you can expect a tax bill on the amount of money that the lender decided could not be collected from you. Your former lender usually should send you an IRS Form 1099-C (“Cancellation of Debt”) to let you know that the debt that you no longer owe triggered an increase in income taxes at the time of debt forgiveness. Remember that the IRS also gets a copy of the 1099-C and is unlikely to forget the incomes taxes that you now owe.

You may wonder why you receive debt forgiveness income when you cannot repay a loan. One point that will be discussed later is that the IRS does not see income when a debt is cancelled so the explanation here is general. The idea behind debt forgiveness resulting in income begins with the fact that the funds you originally borrowed were not income since those funds represented money loaned to you that had to repay to the lender. When a debt is forgiven, you no longer have to have any obligation to pay back whatever amount of the loan remains unpaid – essentially, your wealth has increased now that you have money that you can keep.

As long as none of the exclusions or exceptions (which will be mentioned below) regarding debt forgiveness income applies, the formula for calculating income simply involves subtracting the fair market value of the property from the debt owed at the time that the lender took a specific action, such as foreclosure or repossession. Also, you may receive a capital gain due to foreclosure, for example; this is not debt forgiveness income but usually occurs when the property’s fair market value is greater than its adjusted basis (approximately your original purchase price plus the costs from major improvements). An amount could be excluded due to the length of time that this was your personal residence during the last five years – I won’t go into the details here because the focus is on debt forgiveness for the moment.

There are several exceptions when debt forgiveness does not lead to taxable income. The examples provide general rules about various exceptions, which could be subject to exceptions themselves – consulting with someone who handles these matters about your specific situation always is advisable.

In general, a debt that is cancelled through a gift, a bequest or devise, or an inheritance is not considered income. Certain student loans also provide that all or part of the debt incurred to attend a qualified educational institution will be canceled if the person who received the loan works for a certain period of time in certain professions for any of a broad class of employers. If your student loan is canceled as the result of this type of provision, the cancellation of this debt isn’t included in your gross income. To qualify for this treatment, the loan must have been made by entities in one of three categories: 1) the federal government, a state or local government, or an instrumentality, agency, or subdivision of one of those governments; 2) a tax-exempt public benefit corporation that has assumed control of a state, county, or municipal hospital, having employees defined as public employees under state law; or 3) an educational institution (an organization that has a regular faculty and curriculum as well as regularly enrolled students who attended educational activities at that place). Other criteria have to be met for these loans not to be income if they are cancelled. One major reason for debt forgiveness here is to encourage students to serve in occupations or areas with unmet needs in which the services provided are for, or under the direction of, a governmental unit or a tax-exempt Section 501(c)(3) organization.

There also is an exception for deductible debts. Most individuals use the cash method of accounting so income is seen when the money is received while expenses are counted when money is paid for goods or services. Therefore, when a debt was supposed to be paid but the obligation to do so was forgiven, you would not realize income at that time if payment of the debt would have been a deductible expense for you.

The Home Affordable Modification Program (HAMP) also has some exceptions to debt forgiveness income. Reduction of your principal mortgage balance generally is not income when Pay-for-Performance Success Payments and PRA investor incentive payments are involved. Meanwhile, when the principal balance is reduced due to Principal Reduction Alternative under the same program, you should expect that you have taxable debt forgiveness income. Any exception to possible debt forgiveness income can become complicated; again, seeking a professional’s assistance is the best way to protect yourself from making costly mistakes in this area.

After any possible exceptions are reviewed, you then look at the exclusions. For individuals, some of the most common situations that are excluded from consideration as income from the cancellation of a debt would be the following. The most common one probably involves bankruptcy – if a debt is discharged in a bankruptcy case, then it cannot be counted as income from debt forgiveness. Insolvency, which involves a situation when your assets have a fair market value that is less than the amount of all of your debts, also would exclude you from having debt forgiveness income. However, this is not easily determined so you would be wise to have a tax professional examine your financial position to determine if you are insolvent.

Another category of exclusion that is complicated and would require the help of a tax professional usually deals with certain farm debts. The IRS also has noted that non-recourse loans are not subject to debt forgiveness. These loans permit a lender to repossess the property that you financed with the unpaid debt or, if this does not apply, the property that you used as collateral in the event that you defaulted on the loan. There is no personal liability for the default on a non-recourse loan, which is why you do not gain taxable income from the debt’s cancellation. On the other hand, this type of loan still could result in a capital gain when the property is sold.

Exceptions should be applied before you apply the exclusions because their effects on “tax attributes” of yours are different. Unlike exceptions to tax forgiveness income, exclusions require you to reduce tax attributes, which include certain credits and losses as well as the basis of assets. Remember that, while income due to debt forgiveness can seem to be a relatively simple concept, there are many twists to this concept of which you must be aware, and the only way to approach this is to consult with a tax professional about all of the implications that ultimately will impact your tax bill.

There is one final word of caution when the possibility of income from debt forgiveness exists. Whether or not a Form 1099-C was received does not determine income tax implications. The IRS requires these forms only under certain circumstances. When a creditor cancels a debt of less than $600, you may not get a Form 1099-C. However, you must look at the possibility that you received income that is taxable due to debt forgiveness despite the absence of the 1099-C because the IRS would look for income in this situation and will not be do forgiving if you neglected to pay tax that you owed.

A Self-Funded Special Needs Trust, an Exception for Medicaid (MA) & SSI Eligibility

In 1993, Congress passed a law (often called OBRA ’93) that allows some disabled individuals to be the beneficiaries of what is known as “self-funded” Special Needs Trust (SNT) under the Social Security Act. This is set out in Title 42 of Section 1396p(d)(4(A) of the U.S. Code. Since the law can be somewhat confusing, the Social Security Administration (SSA) developed a review process with 8 steps when its staff evaluates a trust under this law.

In terms of terminology, we are looking at self-funded Special Needs Trusts. Another type of trust is called a “supplemental needs” trust. This developed from cases, not specific legislation. While OBRA ’93 permitted assets of disabled individuals to be used in certain types of trusts, a supplemental needs trust has created by a third party with the assets of the third party. However, we only look at self-funded SNTs here.

In reviewing the steps used by the SSA, these also provide a practical way to quickly determine if a person who might meet SSA’s definition of disability could be the beneficiary of a self-funded SNT. If it survives this quick test, then you still must pay attention to the remaining details for SNTs. After all, a person with the trust generally can’t benefit if leads to ineligibility for government benefits based on need, such as Supplemental Security Income (SSI) and Medicaid (generally known as Medical Assistance, or MA, in Pennsylvania).

The first step looks at the age of the disabled individual. A Special Needs Trust that holds the assets of a disabled person must be created before the person reaches 65. The trust can continue after the individual’s 65th birthday, but it must exist as a self-funded SNT before that date.

Next, the SSA focuses on the source of the trust’s assets. There must be assets in the Special Needs Trust that a person meeting the SSI definition for disability, which generally involves a medical impairment that prevents the person from engaging in full-time employment for a period expected to last at least 12 consecutive months. If not (on either count), a self-funded SNT cannot exist.

The third requirement of the SSA is that the person meeting the definition of “disabled” is the trust’s only beneficiary. This does not mean that the trustee can’t make direct payments to third parties if these do not pay for anything defined as food or shelter by the SSA. However, the trust can’t give benefits to third parties during the disabled person’s life. Also, the trust can’t be terminated during the individual’s life (unless the trust’s property – often called the corpus or principal – could be paid only to the states or creditors for goods or services that were provided by them to the disabled person.

In addition, Social Security reviews how the trust was created in the fourth step of its evaluation. Specifically, only the following can place the person’s assets into the trust: a parent, grandparent, a legal guardian, or a court. The disabled individual cannot place assets into the self-funded Special Needs Trust. However, parents and grandparents may be allowed use a small amount of their money to start the trust, after which the disabled person (or a person with legal authority, such as via a Power of Attorney, to exercise control over the disabled person’s assets) may transfer property into the trust. As for a court, it must issue an order creating the trust; anything less (like merely stating approval of the trust) is insufficient. Basically, action by an appropriate party must be taken to start  the SNT. The reason that the agent under a Power of Attorney isn’t an appropriate party is that the disabled person gave the agent permission to act  here and has control over the existence of the relationship.

The fifth step in establishing the self-funded Special Needs Trust is that the document must require reimbursement from the trust after the disabled beneficiary’s death to all states that made Medicaid payments for the individual. No other debts can be paid until all of these amounts have been repaid. This is why these trusts are called payback trusts, with the repayment not limited to Medicaid received during a specific timeframe in the trust document.

If the criteria in the first five steps are not met, this still could be a “pooled” trust, which was created in the same legislation (OBRA ’93). This bears some similarity to a bank account controlled by the bank. However, the strengths and weaknesses of this type of trust account merit more detailed explanation than can be given in a paragraph. What is probably most notable is that the disabled person can work with a nonprofit organization to set up the pooled trust account. For now, it should be noted that the SSA goes to the eighth step when a pooled trust might be involved.

As noted in the first step, assets of the disabled person must be in the trust before the person’s 65th birthday. The sixth step looks at additions to the Special Needs Trust after the person has reached 65. In general, the regular SSI and MA rules apply so, after the month of the addition, it will count as a resource. In the month that it was placed in the trust, it might be considered income or a resource, depending how it became part of the trust. Annuity and support payments can be exceptions to the rule if there was a right to receive payments prior to age 65, with the rights to payments assigned irrevocably to the SNT before that age.

There is no issue regarding increases in the principal of the self-funded Special Needs Trust due to assets of the disabled individual placed in the trust before turning 65. Interest, dividends, and any other earnings from that part of the trust are not considered additions.

This leads to Step 7, which focuses on assets in the trust before the individual reached 65. If someone has legal authority to revoke or terminate the trust and any of its funds are then available for food or shelter needs, the principal is considered a resource for SSI eligibility. Also, when a person can use the principal for support and/or maintenance, it again is a resource. Finally, when the disabled beneficiary has an interest that can be sold, this person has a resource. The SSA provides the example of an individual who has the right to monthly payments. Unless a spendthrift provision is in the trust, the right to these payments could be sold for a lump sum that also would count as a resource.

Step 8 does not involve the self-funded Special Needs Trust because it looks at assets placed in trust after 65. It looks at whether these assets qualify as a pooled trust. Since this is a different exception to SSI and MA rules from OBRA ’93, it won’t be examined here. However, it is important to remember that this other exception is available if an SNT is no longer a possibility.

Business and Chapter 11 Bankruptcy

Business – particularly small business – forms the backbone of the U.S. economy. According to the Small Business Association website, there are 28 million small businesses in this country, and they account for 54 percent of all sales and 55 percent of all jobs. There is no good definition for “small business” because this classification differs from industry to industry. However, all businesses face an unfortunate fact of life: most that start up must wind down sooner than later. Depending on the industry, at least one half of new businesses are unlikely to survive for five years. When a business begins to fail, it may look to protections that the Bankruptcy Code can provide. This often means looking at a Chapter 11 filing in an attempt to save the business, but this is a possibility exists mainly for one established as a separate legal entity, such as a corporation (including a Limited Liability Company) or legally formed partnership (including Limited Liability Partnerships).

A sole proprietor is in a different position. If the business or the individual files for bankruptcy, the individual or the business, respectively, also files. Chapter 11 generally is not available here. However, if the debtor wants the business to survive the bankruptcy, then a filing under Chapter 7 would not be helpful since a trustee will be appointed and will control the bankruptcy estate. The trustee is likely to shut down operations and liquidate assets in order to make payments to creditors.

When a debtor who is a sole proprietor wants business to continue in business after a bankruptcy filing, the individual should consider incorporation prior to filing or, possibly, a Chapter 13 case since the debtor generally would remain in possession of the business in a filing under Chapter 13. If there was an incorporation, then Chapter 11 again can be viewed as a possibility. This article will look at separate legal entities seeking to continue operating into the future. As with General Motors during the last decade, bankruptcy under Chapter 11 can succeed, but a small business that looks to protection under this chapter must understand what it is getting into and the likelihood of getting out of it successfully.

The general purpose for filing for bankruptcy under Chapter 11 is “reorganization.” This actually amounts to a plan for the repayment of debts while the entity continues in business. As an aside, Chapter 11 can be used by certain individuals when their amount of debt prevents them from filing under Chapter 13; however, this is the exception to the usual filing under Chapter 11. There also is Chapter 11 “liquidation” for a business, but this not the usual reason for a Chapter 11 filing so it will not be discussed here.

A business that continues to operate as it pursues bankruptcy under Chapter 11 is a “debtor-in-possession,” which essentially places it in the position that an appointed trustee usually occupies. The trustee is supposed to manage the bankruptcy estate and to sell off its assets in order to pay creditors when possible, but, with an ongoing business, its assets remain in the hands of the entity to provide an opportunity to continue operating. This also means that the business has fiduciary responsibilities and must act in the best interests of its creditors, which may be contrary to its own best interests.

While the business faces obstacles due to fiduciary responsibilities to creditors, Chapter 11 does give it various powers that can increase the chances of success. These include is ability to object to creditors’ claims, avoid liens, reject leases and contracts without penalty, extend the time to repay to current creditors and potentially reduce the amount owed to them.

Although having the potential to use these powers is beneficial, there also are realities that reduce the chance of emerging from Chapter 11 successfully. There tends to be more litigation involved in these bankruptcies – creditors suing the business, and vis-a-versa. Even if the litigation ends favorably, the cost to finance it can be considerable.

There are other practical problems when a business files under Chapter 11. It not only involves a time-consuming process (which could take years to resolve), but it also entails the likelihood of considerable costs beyond those already mentioned. As of February, 2016, the filing fee to begin the process is $1,717. However, there are additional costs that can be much higher. For example, attorney’s fees and related costs can begin in excess of $10,000 and may increase considerably depending on the case’s complexity and amount of work that is likely. Also, attorneys and any other professionals usually need to be paid prior to filing since any further payments require authorization by the Bankruptcy Court. There also are numerous administrative burdens along the way – there are reports that must be filed regularly with the Court as well as the Office of the United States Trustee, along with additional fees to be paid.

With so many difficulties facing a business that already is failing, one should not rush to file under Chapter 11. If there will be any chance of success, there must be significant planning in advance. Of course, this really applies to all bankruptcies – a successful outcome is unlikely when a debtor pushes to file right after meeting with the attorney. However, this is even more applicable to Chapter 11 filings, which have the additional financial burdens and administrative requirements that cannot be avoided. Therefore, anyone who would consider such a filing must plan well in advance of an attorney’s involvement in the case, producing as much relevant documentation as possible for the attorney to review before any decision is made.

With all of the requirements during the process itself, it must be remembered that the fundamental purpose here is to prepare a viable Plan of Reorganization that the Bankruptcy Court will confirm. This essentially becomes a contract with creditors, with details about how debts will be repaid as well as the source for payments. Before seeking court approval, creditors generally vote on the plan. They do so by particular creditor classes (secured, unsecured, etc.) that are established. If a creditor class does not approve the plan, the class members still may have to accept it, although this also may force the business to relinquish some assets as a result.

To improve the likelihood of a plan’s approval, a business should attempt to negotiate agreements with creditors for the payment of its debts. A skilled attorney who can craft a proposal that is acceptable to creditors and provides the business with an opportunity to attempt to move forward in a stronger, more stable position is essential.

In the end, all of these efforts may serve simply to forestall the inevitable – a business filing a Chapter 11 case may intend to continue operating after the bankruptcy, but most that file under Chapter 11 will not survive. This must be realized before filing, and other options must be reviewed, including filing a Chapter 7 case.

This is a quick primer on business reorganization under Chapter 11. Any entity that is considering this possibility needs to explore all of the details and implications involved before deciding to pursue this option.

Abandonment of Property

At the start of a bankruptcy filed under Chapter 7, a debtor creates a bankruptcy estate that includes all interests in property in which you, as the debtor, hold any legal title or equitable. To show why abandonment occurs, if you gave a security interest in property, such as a house with a mortgage, in exchange for a loan, you agreed to a lien on that property created by agreement. A lien is an interest in the property that gives the creditor security for payment of a debt or performance of an obligation. This can create difficulties for the bankruptcy estate’s trustee, who looks for estate property to sell to generate funds to pay creditors some amount of money for what you owe them since the security interest must be paid first, leaving a smaller pot left to divided among other creditors.

The security interest also makes the use of exemptions more likely to succeed in protecting property from being lost during a bankruptcy – if the value of the lien and the amount of any exemptions cover your property’s total value, then a trustee could not generate funds for other creditors by selling the property since the secured creditor must be paid while you are entitled to receive the amount of your exemption. However, if you have a considerable amount of property that you want to keep but lack exemptions to cover all of it, you would need to consider Chapter 13 of the Bankruptcy Code, as Chapter 7 would leave at least some of the property unprotected. Meanwhile, in Chapter 13, plan confirmation regarding debt payments vests property interests in the debtor so the trustee doesn’t have to deal with the issue of abandonment.

Any nonexempt property creates an issue for a Chapter 7 trustee, though. It often will be “abandoned” or may be sold back to the debtor. These options arise because the trustee would have to liquidate the property – this involves converting it into cash and paying creditors of the estate. However, the costs of liquidation would include any liens and taxes that exist as well as costs of handling the sale. Often, this leaves little for distribution. This is why abandonment commonly occurs. The trustee decides how much of a burden the asset is when the estate is being administered or deciding that the asset is of inconsequential value and benefit to the estate. The value and benefit to the estate usually are the deciding factors. If the effort and obligations involved in getting rid of an asset outweigh the benefit that the estate would receive, the trustee has no reason to do anything with it. As a result, abandonment of this property occurs, which often puts the asset back in the debtor’s possession.

 Abandonment may happen during or after the administration of the bankruptcy estate, at some point following the meeting of the creditors when the nonexempt assets are turned over to the trustee’s control. Commonly, the debtor schedules the property when filing for bankruptcy, but it is not administered by the trustee through the closing of the estate. The presumption of abandonment will arise and, if no court order states otherwise, the property remains with the debtor by operation of law. Also, a trustee may pursue abandonment prior to the closing of a case after deciding that the property is too burdensome to administer or, more commonly, determining its value is inconsequential and retention does not benefit the bankruptcy estate, as mentioned earlier. This type of abandonment generally requires notice from the trustee to parties that might have an interest in the property followed by a court hearing if a party objects to abandonment.


A party in interest regarding specific property also could file a motion requesting abandonment. The Court would have to sign an order for the property to be abandoned here. While the party bringing the motion usually would be a creditor, the motion could be brought by the debtor who might think that the trustee is waiting for any nonexempt equity to increase in value before finishing the administration of the property, which often is real estate in this situation.

 The Bankruptcy Code does prevent the abandonment of property at times. Property could remain in the bankruptcy estate because it has not been administered or abandoned by the time that the case closes, which could occur when the property that doesn’t appear in the bankruptcy schedules. The trustee cannot administer or abandon unknown property. A debtor might need to reopen the case to attempt to get an order for the abandonment of the property. The cost and the time to do this is a reason for being thorough and forthcoming when you originally decide to file for bankruptcy.

While abandonment can occur at various times and in various ways under the Bankruptcy Code, its impact is what really matters. At the point that abandonment occurs, possession generally remains with the party having possession. Often, the debtor is this person when no security interest exists. However, with property that is used as collateral for a debt, the result could be different. For example, property that was repossessed and remains with the creditor at the time of abandonment may remain with the secured creditor. Often, secured property is under the debtor’s control and will remain there when it is abandoned by the trustee. Since abandonment doesn’t affect the automatic stay’s status, the secured creditor cannot take action to get property returned (for example, via lien enforcement through the legal system).


When the automatic stay ends, a secured party can look to non-bankruptcy laws to see what to do to get the property. With real property, this would involve following the foreclosure procedure under state law; if successful, the creditor eventually could have a sale scheduled.


Abandoned property and unsecured debts lead to a straightforward result since these debts are discharged and the property is not used as security for any debt – the property remains with the debtor. When secured interests are involved, the ultimate disposition of property becomes less predictable. In Chapter 7, the discharge eliminates personal liability for the amount owed so you can’t be sued for any deficiency, such as when property is sold but the proceeds are less than the debt. (You may have to worry about the IRS, though, because you had a debt obligation of which some portion never has to be repaid – this often is considered income to a person who no longer needs to worry about repayment of the entire debt. The IRS does have an exception regarding primary residences and discharge of indebtedness, though.)

Although you aren’t liable for the debt after abandonment of a secured property interest, the lien that attached to the property itself remains if you did not take care of this issue during the bankruptcy. This is why a secured creditor can take steps to sell the property after obtaining relief from the automatic stay or after the bankruptcy court issues the discharge order in your case. If there is no sale, the debt remains attached to the property. As long as a valid lien under state law exists, a secured creditor has a right to payment from the disposition of this property, although you, as the debtor, have been relieved of personal liability through the Chapter 7 bankruptcy.


Length of Separation in Divorce & Its Impact

In 1980, Pennsylvania’s Divorce Code underwent a monumental change. Previously, one spouse had to prove that the other spouse was at fault for the marriage’s breakdown due to such reasons as adultery or indignities (a course of conduct making a spouse’s condition intolerable and life burdensome). She or he also needed to be the “injured and innocent” spouse, meaning that the other spouse was the primary cause of marital discord. 1980 brought “no-fault” divorce, which could be based on the parties’ consent that the marriage was irretrievably broken or based on the length of separation due to the marriage’s irretrievable breakdown. Because the length of separation seems likely to change in the near future, this is the focus here.

In all no-fault cases, one party claims the marriage is irretrievably broken – marital difficulties have caused an estrangement leaving no reasonable likelihood of the parties getting back together. When one spouse won’t consent to a divorce, the no-fault ground focuses on living “separate and apart” for a certain length of time. A separation is a fact-based determination. There is a presumption that the parties separated on the date the divorce complaint was served, but a spouse can choose a different date if the facts support it. Separation doesn’t require living in different residences – living separate lives is what matters. The end of sexual relations and financial independence are factors that help to prove separation. Communicating the intent to separate also is an important fact.

A not-too-uncommon question is how sex between separated spouses affects a period of separation. Involvement one time shouldn’t end the original separation. However, occasional intercourse could be an important fact causing a judge to decide the separation has ceased. An attempt to reconcile for a month or two could end a separation, too. If the spouses break up yet again, the separation starts all over again.

The ability to obtain a divorce due to the length of separation has important implications. Before no-fault divorce in Pennsylvania, only the “injured and innocent spouse” could obtain a divorce. No-fault grounds mean that even a spouse whose behavior causes the marriage to fall apart can obtain the divorce. Additionally, if a no-fault ground exists for granting the divorce, then a fault-based divorce cannot be obtained. The length of separation required can come into play here. If one spouse won’t consent and the parties haven’t been separated long enough for a non-consensual no-fault divorce, then the spouse who files might seek a divorce based on fault under these circumstances. However, when the required separation period becomes shorter, fewer spouses will have to choose to pursue a fault ground here – if the length of separation is reduced to one year in Pennsylvania, the difficulty of pursuing a divorce on a fault ground would make it less attractive and necessary as the path to obtaining a divorce.

A divorce based on the length of separation affects property and related issues, too. Although the following does not directly deal with the issue of length, spouses who begin living separate and apart have a date of separation. This matters because property acquired after this date is presumed to be non-marital and does not automatically become subject to equitable distribution. (An important point about presumptions in law is that they are not rules without exceptions; instead, when someone gets the benefit of a presumption, the other party can rebut it with evidence overcoming the presumption.) A longer period of separation generally will mean the parties will claim more property as being acquired after the separation and, therefore, not subject to equitable distribution.

A divorce case often involves issues beyond the divorce itself, including property distribution, custody, and support. At one time, divorces in Allegheny County generally would be subject to automatic bifurcation, which meant that the divorce was granted before the remaining claims were resolved. In 2005, the Divorce Code was revamped so that bifurcation became the exception. For the exception to apply in a divorce based on the length of separation, a party has to establish specific grounds for the divorce as well as compelling circumstances favoring bifurcation for the marriage to end before economic claims are decided. The court wants to see that the dependent spouse, in particular, receives economic protection during a bifurcated divorce.

While different counties may be more likely to allow bifurcation, it should be remembered that the statute doesn’t favor bifurcation. Therefore, a party in a divorce based on length of separation could have to wait for the required separation period to pass and then wait even longer for other claims to be decided before receiving a divorce decree. If the period of living separate and apart becomes one year, this should result in a shorter period overall for a decree in divorce even without bifurcation.

A final note about changes in the length of separation: the last change occurred in 1988 and affected any separation that began after February 12th of that year. If you separated on February 13th or later, you had to wait two years while a separation that began on February 12th still was subject to a three-year separation. Whether this approach would be used again isn’t known yet. However, it is something to think about if you’re considering a possible separation and divorce right now.

The Value of Valuing Personal Property in Bankruptcy

If you file for bankruptcy, you also must file a Schedule B, listing all personal property in which you have any legal or equitable interest. This is important because you cannot protect what is not listed in this schedule. The description must contain sufficient detail so that the trustee and creditors have a good idea regarding what the property is, what its condition is, and so forth – this will help to determine what could happen to it prior to the bankruptcy discharge. You also need to make clear about your interest in the property since this will impact the value included in Schedule B, which leads to the point of this schedule: it must provide the current value of your interest in the property, without adjustment for secured claims or exemptions.

You must include all property, even if it would not be in the bankruptcy estate (which places it under the trustee’s control). The list includes causes of action for which you can sue, government grants for which you are eligible, security deposits, earned income tax credits as well as tax refunds that you will receive, and support obligations payable to you.

Property has to be listed so you can protect it. You will exempt the property using available exemptions — not doing so allows the trustee to sell it to pay creditors whom you owe. Without a listing and a description that is detailed, an exemption could be denied because the trustee cannot get a good idea of the property’s value – again, the potential for a sale exists. If you forget to list something, you may be able to amend the schedule to include it, but you should take care to have a complete inventory as of the date of filing. Scheduled property that the trustee has not administered by the end of the bankruptcy is abandoned to the debtor so you will not lose it, but unlisted property can cause you many problems, including losing it.

After you have the list of personal property, you need to review it and place values on items in the list. This doesn’t mean that each item has to be valued. Some things that would have an individual value below $575 and would be considered household goods can be combined into one category – for example, you could value pots and pans or silverware or your clothing in groups (although you should give some idea of how much is in these groups since details matter here). With property such as furniture, appliances, and clothing, remember that they tend to lose value quickly, and the value to list is the current fair market value, not replacement values. Basically, you look at the price that they reasonably could bring at a garage sale. Since they wouldn’t raise much money, a trustee – who seeks to raise funds to distribute among creditors – is unlikely to go to the expense of, essentially, holding this garage sale.

Personal property of greater value (such as expensive jewelry or artwork) could be worth more than the value that you can exempt. Property in these categories might be sold during a bankruptcy, which is a consideration before filing but cannot be “forgotten” in Schedule B if you do file. Also, you might want to have these appraised before they’re listed since they are not common, ordinary items like the property mentioned in the preceding paragraph.

A few other categories of personal property merit some mention here. One consists of your financial account, including checking accounts. The value as of the date of filing is needed. If you have written checks that have not been cashed yet, this is not a problem. You simply would exempt the higher value. However, never add funds after the account is valued on the date of filing because you don’t want to list a value that is too low on Schedule B.

Additionally, intangible personal property must appear on the schedule. You need to pay attention to detail in your description of this type of property because valuation often is difficult. As an example, if you have a cause of action against someone and seek a monetary award, the value to include is not the amount that you are seeking because you may not receive this. You have to adjust the value based on the odds that you will win and be awarded that amount – in law, there is no such thing as a sure thing. Beyond this reality is the possibility that, while you may be awarded monetary damages, you could have trouble collecting the judgment. The value in Schedule B should be reduced to reflect such reasonable possibilities. If the value is too hard to estimate with any accuracy, you might list it as “unknown” while providing an accurate description so that you can attempt to exempt it while the trustee has an opportunity to try to place a value on it.

The last category, for now, consists of property that is not part of the bankruptcy estate, which only includes non-exempted items and is under the control of the trustee. Because Schedule B requires the inclusion of all your personal property, everything appears in it. A common example is an interest in an ERISA-qualified pension. Generally, this is not part of the bankruptcy estate, but, if you take this position, you should include a reference to a statute that protects it in the schedule. Meanwhile, just in case the trustee doesn’t agree with your interpretation, you could claim an exemption in Schedule C “in the alternative” for additional protection.

With all personal property in Schedule B, you want to be as thorough and accurate as possible with descriptions and valuations. You don’t want to face the possible loss of property because you neglected to list it, and you also want to exempt as much of the listed value from the bankruptcy estate so that the property can remain yours after the bankruptcy has ended.

The Financial Power of Attorney after Act 95 of 2014

The Pennsylvania Legislature saw a need to protect individuals from the abusive use of powers by Agents under Powers of Attorney. Act 95 of 2014 was the result. Most of the new law took effect at the beginning of this year. If you had a Power of Attorney (POA) drafted after January 1st or want to get a Power of Attorney so that your financial affairs could proceed even if you no longer could handle them, then you must make sure it complies with Act 95’s changes. Generally, an older POA remains valid. However, due to the changes involving various powers, you might be wise to discuss your current and future concerns with an attorney to see if a new Power of Attorney might benefit you. Also, while you could go to the internet to attempt to draft a POA, remember that Act 95 made major revisions to the law, with the added complexities needing review during the drafting process – a do-it-yourself POA found on a website is not exempt from the new requirements but may not include them.

Unlike POAs focused on medical issues, a financial Power of Attorney in Pennsylvania should include the statutory Notice signed by the Principal, for whom the POA exists, and requires an Acknowledgment for all Agents named by the Principal regarding their duties when acting in this capacity. Both forms changed at the beginning of 2015. The Notice has been revised and must include only capital letters. The Acknowledgment experienced a greater overhaul. While the statutory example was altered, the actual wording now can deviate from the example. For example, you could decide your Agent doesn’t have the duty to keep assets separate from yours. Although this usually is not a good decision, Act 95 allows the waiver of this duty by the Principal, which means that it would be deleted from the Acknowledgment. Before the new law, this duty was mandatory and had to be in the Acknowledgment.

Another change with the financial Power of Attorney is what legal requirements exist for its execution. Pennsylvania only required the date and Principal’s signature at the end. No witnesses were needed. Now, you need two witnesses (neither of whom is an Agent in the POA) as well as a Notary’s involvement. Also, none of these three roles can be filled by the same person so, while only the Principal was needed prior to this year, three additional people now are required to have a valid Power of Attorney. This is stricter than what other estate-planning tools, such as a Will, require for execution. It has been suggested that the reason for this is due to the impact on the Principal being greater under the POA (since the person still is alive) than it would be with a Will, which takes effect after death. Regardless of the reason, you have to be aware of this if you want your POA to be recognized in Pennsylvania.

Those are important changes, but the usefulness in estate planning of the Power of Attorney is affected elsewhere in Act 95. Due to sweeping changes introduced by this law, not all can be covered here, but some major ones follow.

“Reasonable expectations” have been added. An Agent should act according to your reasonable expectations “to the extent actually known.” This may seem a bit vague since the Agent has to know your reasonable expectations in any area that you granted the Agent authority to act. To ensure your Agent knows what you expect, you have to include these expectations in the Power of Attorney — they aren’t defined elsewhere, and only you can define your reasonable expectations. Agents also must act loyally for the Principal’s benefit. What if acting loyally works against the benefit of the Principal? The drafting of the POA is important in defining terms and duties for guidance and to avoid “what if” scenarios that could arise under the new law.

Duties of the Agent have been touched upon, but they are tied to powers given in the Power of Attorney. Again, Act 95 has made numerous changes in the law. While the Power of Attorney is a general grant of authority for an Agent to act, eight powers (so-called “hot powers”) must be explicitly listed to be available. These, generally, are concerned with estate-planning issues. They include: creating, amending, revoking, or terminating an inter vivos trust; making a gift; creating or changing survivorship rights; creating or changing a beneficiary designation; delegating authority granted under the Power of Attorney; waiving the Principal’s right to be a beneficiary of a joint and survivor annuity, including a retirement plan’s survivor benefit; exercising fiduciary powers the Principal can delegate; and disclaiming property, including powers of appointment.

There also are 22 statutory “short-form” powers that can be in the Power of Attorney. These are familiar to anyone who has worked with the prior law. To a large extent, they are estate-planning tools. However, two of them involve healthcare issues and probably should be in a separate medical POA since Act 95 focuses on financial issues. Also, the power to make “limited” gifts is noted while the power to make gifts is a hot power. They are different because a limited gift cannot exceed the annual gift-tax exclusion ($14,000 currently) while the other power is not limited. Although short-form powers are not as powerful as hot powers regarding changes they can make, they still have value when it comes to estate planning. Beyond estate planning, the Power of Attorney could handle a related topic: long-term care planning. Knowing the Principal’s objectives is crucial in drafting a document tailored around powers needed to achieve those objectives.

This gives a basic view of various issues that Act 95 has introduced into the drafting of a financial Power of Attorney. Much more can be said and written about this topic. This, ultimately, is the main point. Sweeping changes have been made, and there is no way one POA size can fit all. Before you decide to execute a Power of Attorney, you must know the options and their possible implications. As these implications can be substantial, you should consider consulting an attorney who works in this area of law because what may have seemed simple to do previously is now a complex web of possibilities to explore to find what fits your needs and wishes. Such is the state of the Power of Attorney in Pennsylvania after the advent of Act 95 of 2014.

The Sequential Evaluation – How Disability Determinations are Made

In every disability determination, the Social Security Administration applies what is known as the 5-step sequential evaluation. We will look at this process in the context of a hearing with an Administrative Law Judge (ALJ), but the sequential evaluation is used during each stage that a decision must be made regarding whether or not an individual meets the criteria for being found to be disabled.

The first step in the sequential evaluation involves the issue of Substantial Gainful Activity (SGA), which generally is determined by earnings. If you are working at the time of your hearing and earn more than the monthly SGA level, then you are not currently disabled. There are times when you may be working now but had not worked during most of the period prior to your hearing (which usually is more than 1 year). This could allow you to be found to have a “closed” period of disability that ended when you began to work. As a result, you could receive retroactive disability benefits for the months of the closed period, even though you are ineligible for monthly benefits. However, for any period of disability, the remaining steps of the sequential evaluation have to lead to the determination that you are (or were) disabled.

Assuming that your health prevents you from engaging in substantial gainful activity, the ALJ will move to Step 2 of the sequential evaluation. This focuses on whether you have at least 1 “severe” impairment, which is a health problem that causes some restriction of a work-related activity. You need medical documentation of this impairment. There also is a time element involved – you must have been severely impaired for an entire year. If you have had a severe impairment for less than 12 continuous months, you still can get through Step 2 if your impairment is expected to last for at least one year or to result in death prior to one year. In general, the ALJ will find 1 or more severe impairments, as this is a minimal test in the process. Things become more difficult after this point.

When the sequential evaluation reaches Step 3, attention turns to whether or not you have a listing-level impairment or if your condition, considering all limitations caused by all of your impairments (even those that would not be seen as “severe” when viewed alone), is equivalent to a listing. These listings are found in the Social Security regulations and can be broke into 2 categories, physical and mental. To meet a listing, you must meet certain criteria spelled out in that listing. On occasion, a person might have an impairment (or a combination of impairments) not covered by a particular listing. A listing could be met based on medical equivalence. For example, a recent case found that Listing 11.03 (non-convulsive epilepsy) could be applied to someone suffering from migraines (for which there is no listing). If a listing is met, you are disabled, and you do not have to go through the rest of the sequential evaluation. Most cases are not decided at this point, though.

The next step is not actually one of the 5 steps in the sequential evaluation. Before the ALJ looks at the fourth step of the process, the ALJ has to decide your residual functional capacity (RFC), which looks at the work-related abilities that you retain despite your impairments. Depending on your impairments, you could have a physical RFC and a mental RFC. However, if your impairments are only exertional (which means that they are related to strength), there are medical-vocational grids that the ALJ can use to determine if there are any jobs that you can do. When both exertional and non-exertional impairments (such as depression) are present, these grids can be used as a framework for deciding your case but cannot dictate the disability determination as they can when you only have exertional impairments. When the grids can‘t be used to decide the case, the ALJ needs the help of a person who is called a “vocational expert” to finish the sequential evaluation.

The ALJ’s determination of your RFC becomes crucial at Step 4 of the sequential evaluation that looks at your Past Relevant Work (PRW). At this stage, the vocational expert is asked whether you could do any of your prior jobs (which generally are jobs that you performed at SGA level for more than a few months during the past 15 years of your work history) based on your current RFC. If you are found to be able to do so, then you are not disabled. If you can’t do any of your PRW, then your claim reaches the final “official” step.

At Step 5 of the sequential evaluation, the ALJ asks the vocational expert questions about a hypothetical worker. These are based on your RFC. Generally, an ALJ may present 2 or 3 hypotheticals to the vocational expert, who is supposed to know if there are any jobs in the national economy that exist in “significant numbers” that you could do on a full-time basis, basically. One of the hypothetical workers represents the ALJ’s view of you, although you are not told which is supposedly you. However, if the vocational expert can find no jobs for that hypothetical person, then you are disabled

Although you may be disabled at what would appear to be the end of the sequential evaluation, there is a last test that you must pass. This involves alcohol or other drugs. If a person is using any of these, the ALJ will decide if this usage is a “substantial and material contributing factor” to your being disabled. In other words, would you still be disabled if you stopped using alcohol or other drugs? If this would not affect your ability to perform SGA, the decision that you are disabled would be the final decision in your case.

Focus on the Continuing Disability Review

When you are found to be disabled, you should expect to face continuing disability reviews in the future. After any disability determination, a date known as a diary will be scheduled for a review. Generally, they are supposed to be three or seven years after the most recent disability finding. Some disabling impairments, such as many mental illnesses, are considered more likely to improve so a three-year review may be set. Others – like low intellectual functioning – generally remain throughout one’s life, but the law requires reviews so they probably would be set for review seven years after the most recent disability determination. The likelihood of improvement is the key so a condition initially found disabling but viewed as one that probably won’t last beyond than the one-year requirement in the Social Security Administration’s disability definition may be revisited within a year of the current decision.

At times, insufficient funding has made review less likely than the law dictates. Recently, Congress increased funding for continuing disability reviews so people who have escaped review in the past should be aware that they might be not so lucky in the near future.

A continuing disability review (CDR) will focus on your medical condition instead of your financial situation. There are various factors considered in this decision regarding whether or not your condition continues to prevent you from working enough to remain disabled under the agency’s rules and regulations. The basic issue is if there has been any medical improvement in your impairment(s) that led to you being found disabled. If there has been improvement, the next issue is if the medical improvement has affected your ability to work. However, even when there has been no medical improvement, there is another factor: do any exceptions to medical improvement (which will be discussed briefly later) apply? If there is no medical improvement applicable exception, you remain disabled.

What happens if the continuing disability review shows that you have medically improved – and the improvement is related to your ability to work – or an exception to medical improvement applies? You may lose your disability benefits. In general, this only occurs if the SSA finds that you can do substantial gainful activity (which is basically working 8 hours a day for 5 days each week). Also, even when your condition has improved, you still may be disabled because the SSA then has to decide if your condition meets its current disability rules. In the end, most people actually keep receiving benefits after a CDR.

The definition of “medical improvement” in a continuing disability review is any decrease in the medical severity of your impairment(s) that were present during the most recent determination that found you disabled, often referred to as the “most recent comparison point.” If you have not been reviewed after your initial disability determination, that initial decision is the comparison point regarding any improvement. However, if you had a CDR after the first decision, your condition at the prior continuing disability review is now the comparison point. Medical improvement could be found based on improvements in your symptoms (which you report), signs (as observed by medical professionals), and/or laboratory findings associated with your impairment(s).

Medical improvement alone doesn’t mean that your disability has ended. Improvement must be related to your ability to work. If the impairments that led to the finding of disability at the most recent comparison point now are less severe, your improved condition won’t not affect your disability status if your functional capacity to perform basic work activities hasn’t increased.

Even if your functional abilities have increased, you must be able to perform substantial gainful activity defined by the SSA in the year of the continuing disability review to end your disability benefits. Unless your capacity to work improves to this extent or one of the exceptions (which will be mentioned later) applies to you, your benefits will continue. What is “functional capacity to do basic work activities?”

Disability looks at the inability to do any substantial gainful activity due to any medically determinable physical or mental impairment. “Basic work activities” are abilities and aptitudes required by most jobs. They include exertional abilities, such as walking, standing, pushing, pulling, reaching, and carrying. Nonexertional abilities and aptitudes include seeing, hearing, speaking, remembering, using judgment, handling changes, and dealing with supervisors and coworkers. A person with no impairments can do all of these, basically, and has an unlimited functional capacity for basic work activities.

Disabling impairments result in some limitation to the functional capacity for at least one of these basic work activities. Residual functional capacity (RFC) is what you can do despite limitations caused by an impairment. If you can’t perform substantial gainful activity based on your RFC, you are disabled. Your RFC is used to determine whether you can do your past work or, considering your age, education, and work experience, other work at the level of substantial gainful activity.

In a continuing disability review, the Administration must determine if any medical improvement is related to your ability to work when there is a decrease in medical severity shown by symptoms, signs, and laboratory findings. The SSA assesses your residual functional capacity based on the current severity of the impairment(s) present at your last favorable medical decision.

The new residual functional capacity is compared to your residual functional capacity during your prior disability decision. An increase in your residual functional capacity is based on actual changes in the signs, symptoms, or laboratory findings – otherwise, any medical improvement isn’t considered related to your ability to do work.

There are additional factors and considerations that can be part of the continuing disability review. Generally, the most important of these are any exceptions to medical improvement. There are two groups of exceptions to medical improvement reviewed at a continuing disability review. The first focuses on current impairments and the ability to do substantial gainful activity. The Administration looks at evidence that you no longer are disabled – or, perhaps, never should have been considered disabled. There must be substantial evidence of any of these.

One exception arises if you benefited from advances in medical or vocational therapy or technology related to your ability to work. There also may be new or improved diagnostic or evaluative techniques showing your impairment is not as disabling as it was found to be during your most recent favorable decision. A third exception involves substantial evidence showing a prior disability decision was in error, although this only can be found when conditions for reopening a prior decision are met.

The second category of exceptions to medical improvement not involving medical improvement or substantial gainful activity also can lead to an end of your benefits at a continuing disability review. One involves a prior determination or decision was fraudulently obtained. The Administration looks at physical, mental, educational, or language limitations that you had at the prior determination. Another exception concerns not cooperating with the SSA. If asked for medical or other evidence or told to go to a medical examination, you will be found no longer disabled if you ignore such “requests,” provided you lack good cause for the failure. The third exception in this group seems obvious: if the SSA cannot find you and has questions regarding your disability, your payments will be suspended. Finally, your failure to follow prescribed treatment which would be expected to restore your ability to engage in substantial gainful activity, unless you show good cause for this, will end your entitlement to benefits.

If you are notified your Social Security disability benefits are to be ceased after an unfavorable continuing disability review, your benefits will continue for two more months to allow you time to arrange other support. (You also may be able to contest the decision.) The only exception to the two-month rule is if your benefits are ending for failure to cooperate – in that case, they would cease immediately.