Category Archives: Debt Relief & Bankruptcy

Protecting Retirement Funds in Bankruptcy

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When you file for bankruptcy for consumer debt, everything that you own generally becomes part of your bankruptcy estate. The bankruptcy trustee in charge of the estate could sell these assets to raise funds to pay debts. However, most debtors will find exemptions under the Bankruptcy Code that will protect all, or at least most, of the property in their estate. Property that could not be exempted may remain in the estate because the trustee will look at the cost of selling it versus the amount that a sale would bring and decide to abandon or sell the property back to the debtor. On the other hand, the status of pensions, retirement funds, and similar accounts still is somewhat ambiguous in bankruptcy law.

Looking at the Bankruptcy Code, Section 541(c)(2) states that restrictions on transferring a debtor’s beneficial interest in a trust which are enforceable under applicable nonbankruptcy law will remain enforceable in a bankruptcy case. If the law shields a beneficiary’s interest in a trust from creditors, then the same protection applies during a bankruptcy.

In 1992, the U.S. Supreme Court decided the language in this  section applied to certain types of pensions. ERISA-qualified pension plans were found to be excluded from the bankruptcy estate because this federal law had an “anti-alienation” provision that protected pensions that are covered by ERISA.

Then, in 2005, the Bankruptcy Code was amended. Section 522 was revised to allow the debtor an exemption, usually without limitation, in most types of retirement funds. With this change, whether or not a pension is part of the bankruptcy estate ceased to be an important issue when attempting to protect such plans after a bankruptcy filing. Congress also added provisions stating that any amount withheld or received by an employee in retirement funds or employee benefit plans are not property of the bankruptcy estate.

This does not protect everything, however. If you file for bankruptcy while you are in the process of rolling over your pension funds into another plan, you leave yourself open to the claim that these funds were not in an ERISA-qualified plan when the bankruptcy was filed. Therefore, as the argument goes, your retirement funds should not be  excluded from your bankruptcy estate. This also shows the importance of timing when you decide to file for bankruptcy. Under this scenario, to avoid a possible problem, you could wait to file your bankruptcy case or undertake the rollover. By doing so, the bankruptcy case will be filed while retirement funds are in a qualified plan.

Non-ERISA plans face other issues. For example, the Supreme Court’s 1992 decision pointed to retirement funds that do not qualify under ERISA, determining that they are not entitled to its protection as a result.

Individual retirement accounts (IRAs) would be an example here. However, IRAs now qualify as exempt under subsections 522(b)(3)(C) and (d)(12) (with a $1,245,475 waivable cap for funds that were never rolled over from another plan) and may also be protected from alienation under state law. In addition, if a debtor cannot reach funds in a plan, the bankruptcy estate has the same limitation – it cannot have greater rights than the debtor. Therefore, with the already existing protections plus the expanded ones for retirement savings, a debtor will rarely lose retirement funds in a bankruptcy case.

Other types of plans may be considered spendthrift trusts, with the beneficiary having no right to access the funds whenever the individual so desires. Under the laws of most states, due to this limitation, the beneficiary’s interest in such a trust is protected from the person’s creditors. These trusts are excluded from the debtor’s estate under Section 541(c)(2). However, it should be noted that not all spendthrift trusts are protected under state laws – an example is the “self-settled” spendthrift trust created by its own beneficiary, which most states do not protect from this person’s creditors.

Finally, when possible, the debtor also must remember to list retirement funds, pensions, and similar trust interests in Schedule B of the bankruptcy schedules, even if they do not come into the estate. Any argument that the interest is outside the estate should be noted on Schedule B with a reference to subsections 541(c)(2) or 541(b)(7) of the Bankruptcy Code. In addition, nothing prevents a debtor from claiming on Schedule B that property is outside the estate but listing an applicable exemption on Schedule C in the alternative as a backup.

A Fresh Start: The Bankruptcy Estate in Chapter 7

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Most individuals who file for bankruptcy do so under Chapter 7 or Chapter 13 of the Bankruptcy Code. Chapter 13 can be very powerful when a person falls behind in payments on secured loans, such as mortgages or car loans, because it permits you to set up a plan up to five years in length to pay off those missed payments. However, you still need enough income for your necessary expenses, which include current payments of the debts on which you had fallen behind and are included in the Chapter 13 plan. Meanwhile, a Chapter 7 bankruptcy generally focuses on discharging debts that are not secured by any specific property, with a goal of giving you a “fresh” start by getting rid of these debts while keeping as much property as possible. The process of defining what is in your “bankruptcy estate” is crucial in Chapter 7. A brief look at how this means follows.

A fresh start can have no beginning if you are not honest about what you own. All of your property must be disclosed, with exemptions (with amounts and categories defined by the bankruptcy laws) applied to as much of this property as possible. Any property that can’t be exempted or isn’t excluded by law becomes part of the bankruptcy estate, which a bankruptcy “trustee” controls until the bankruptcy ends.

A major part of the trustee’s job is to sell as much of the bankruptcy  estate as possible in order to pay off as much of your debt as possible. Due to the ability to exempt certain amounts of various categories of property, hiding property is not the answer to protecting what you own in order to have an opportunity to make a fresh start after a Chapter 7 bankruptcy. If and when hidden assets are discovered, this property will end up in the bankruptcy estate, and you may face more serious consequences that can include the loss of the property to creditors, the denial of a discharge of your debts, or even criminal penalties.

As you prepare to file under Chapter 7, you begin the process of defining the bankruptcy estate. This starts with making an inventory of all of the things that you own – this means that you have to list everything to which you have some ownership right. Some property that you receive after filing also would have to be included once a right to it exists. For example, property that you inherit within 180 days after filing must be listed in the appropriate schedule.

After an thorough inventory has been completed, you will have an idea of what might be in your bankruptcy estate. To further define your bankruptcy estate, you need to place realistic values on your ownership rights in this property. Sometimes, this may not be possible due to the type of property involved. A good example of this problem is a potential lawsuit that you might be able to bring against another party because you need to consider what the potential award would be if you win, the likelihood of success (which impacts the value of the estimated award), and even the likely ability to collect any judgment that you might be awarded (because a judgment that can’t be collected won’t have much value). In a situation like this, your best approach may be to describe what your cause of action in the lawsuit would be and list its value as “unknown” when you file.

You usually will be able to place a reasonable value on your property, though. This can seem difficult, but an experienced attorney can help you as you work through the list of property that will comprise your bankruptcy estate, unless the property is exempted or, possibly, excluded by law. However, before you can exempt property, you have to make a good-faith effort to value so you can use the exemptions, which are capped at certain dollar amounts.

Individuals often have trouble with this. Sometimes, they may tend to overvalue some property — for example, many things do not retain much value once they have been used. Clothing and furniture fall into this category, but people often tend to value these items closer to the prices at which they were purchased. One approach to start this process is to consider what you might ask for, and be able to get, for something at a garage sale or on eBay. There also are resources that can be used to value an older car while a house may need to be appraised in order to satisfy a trustee and the court. Once you have an inventory of property in which you have rights and have made a good-faith effort at valuing it, you are at the point in which your actual bankruptcy estate will be defined.

First, you look for property is not part of the bankruptcy estate. An ERISA-qualified pension, by statutory definition, never is part of the estate. Next, you consider possible exemptions, which could be state or federal exemptions in Pennsylvania (with the choice depending on which protects your property to a greater extent). This step essentially removes some property from a bankruptcy estate, depending on the property’s value and the amount of the exemption available. For instance, a vehicle with a market value of less than $3675 currently could be exempted from the bankruptcy estate so the trustee handling your property cannot touch it. It should be noted that federal exemptions are adjusted every 3 years — the next adjustment would occur on April 1, 2016.

Eventually, as you move through the steps in this process, what remains is the property that makes up the bankruptcy estate. In many cases, all property will be exempted – this is a “no asset” bankruptcy in which a trustee has no assets to administer to pay any of your debts; in these situations, there basically is no bankruptcy estate. You also could have a “nominal asset” case in which the bankruptcy estate’s value, at best, is little more than the cost of trustee’s administration of it; you may be able to get the trustee to abandon the property that remains because it can be seen as more trouble to sell it than it is worth. If abandoned, the property would return to you.

On the other hand, if your bankruptcy estate has assets that have more than a nominal value, you might be able to pay the value of the bankruptcy estate to the trustee in order to keep your property or the trustee may sell these items to third parties. In either situation, the trustee would use the proceeds to make payments to your creditors.

In the end, this is why the bankruptcy estate in Chapter 7 is of such importance. You want to retain as much property as possible in order to get a fresh start after going through bankruptcy. This requires that, prior to filing, you to pay attention to property that might be lost if it would be turned over to a trustee as part of your bankruptcy estate.

Complications While Same-Sex Marriage Is Banned in Pennsylvania

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[Note: On May 20, 2014, Judge John E. Jones III of the U.S. District Court for the Middle District of Pennsylvania actually issued the decision in Whitehead v. Wolf, in which he ruled as he anticipated the U.S. Supreme Court would rule. In short, based on the Due Process and Equal Protection Clauses of the U.S. Constitution, he determined that Pennsylvania could not justify its law banning same-sex marriages. He also entered an injunction against the enforcement of Pennsylvania’s law that was effective as of that date. The Commonwealth did not appeal so May 20, 2014 is the official date that Pennsylvania became part of the tidal wave of states across the nation that, willingly or not, recognized the legality of same-sex marriages.]

 

In Pennsylvania, same-sex marriage does not is against the law. Specifically, in the Domestic Relations Code, the legislature defines marriage as a “contract between one man and one woman” (Section 1102). Unlike its position on common-law marriage that was discussed in the previous post, it also has rejected the concept of comity, in which the laws of other states usually are recognized and respected. Instead, the legislature has invoked the “strong and longstanding public policy” exception to comity in Section 1704 of the Domestic Relations Code so that same-sex marriages, “even if valid where entered into,” are void here.

However, the U.S. Supreme Court’s decision in United   States v. Windsor, et. al. from June of this year may be the start of major changes throughout the country. Windsor dealt with the federal Defense of Marriage Act, in which Congress defined marriage as a union between a man and a woman. The case concerned two women who were married legally in Canada and then moved to New York, which recognized their marriage. The widowed spouse was the beneficiary in the Will, but the IRS forced her to pay the federal estate tax even though a spouse would have been exempt from this tax. With Ms. Windsor believing that she faced unequal treatment due to her gender, she filed the lawsuit that ended up in the Supreme Court. In what was a landmark decision to put it mildly, the Court found the federal definition of marriage unconstitutional, basing this decision mostly on due process grounds.

Marriage generally is a state-law issue. Windsor does not alter this but does affect federal rights and benefits of legally married spouses of the same gender. Changing the type of marriage found in the example in the previous post from a common-law marriage to a validly entered same-sex marriage, the couple who got married legally in Washington, D.C. can remain same-sex partners but no longer are considered spouses when they relocate in Pennsylvania.

While federal law usually supersedes state law, some issues – including marital and property rights – have been left to the states in most circumstances. This is where Windsor leaves many unanswered questions. The Social Security Administration made an effort to deal with this by issuing regulations after the Windsor decision. In the example, the SSA instructs the person who married in Washington, D.C. and then became a Pennsylvania resident to apply for benefits on the work record of her same-gender spouse when eligible because the marriage originally was valid.

Due to residency in Pennsylvania when she applies, the SSA currently will put a hold on the application, but the application does establish the protective filing date for benefits that may be paid later if the same-sex marriage that does not exist in Pennsylvania becomes valid again as it was when the couple resided in Washington, D.C. Meanwhile, had the surviving partner stayed in Washington, D.C., she could receive benefits now.

Bankruptcy law also relies on state law to define numerous rights, including property rights during marriage. Pennsylvania allows people filing for bankruptcy to choose to use federal or state exemptions for property. When a married couple owns their property as tenants by the entireties, this effectively prevents a spouse from transferring any ownership interest to a third party and generally puts the property out of reach for creditors of only one spouse. If most debt belongs to one spouse, the couple may decide that only that spouse will file, using the state exemptions to protect their joint property. However, a tenancy by the entireties can exist only when there is a valid marriage. Pennsylvania, by declaring same-sex marriage void, prohibits a same-sex couple from owning property in this way. Once again, there is different treatment at this point under federal law and under state law for individuals who, but for their genders, would be in the same situation.

Estates also are affected by marital status. Pennsylvania law gives rights to a surviving spouse preventing this spouse from being disinherited due to a deceased spouse’s Will. However, a person who entered into a same-sex marriage prior to settling in Pennsylvania becomes a virtual stranger regarding estate rights when the other person dies – the individual would not have the rights of a spouse. Instead, a Will would need to identify the person and specifically leave property to him or her (although the survivor essentially receives any part of the estate as a friend, not a spouse).

Also, Windsor provided that, regardless of gender, Ms. Windsor was a spouse and would be treated the same as other spouses under federal estate tax law, dropping her tax rate to zero percent as a result. Meanwhile, Pennsylvania’s inheritance-tax rate for a spouse is also zero percent, but, due to a same-sex marriage being void, an unrelated person of the same gender receiving property through a Will falls into the 15-percent tax bracket. In each of these situations, we see different treatment solely due to gender. Such issues will remain as long as same-sex marriage is rejected in Pennsylvania.

Next year could be a watershed year for Pennsylvania marriage law due to numerous court cases that involve possible recognition of same-sex marriages. A change could come soon after June when Whitewood v. Wolf, which directly attacks Pennsylvania’s statutory ban on same-sex marriage, is scheduled to be heard in a federal court in Pennsylvania. The ban on same-sex marriage and its resulting complications easily could be history in Pennsylvania before 2014 ends. Time – and, most likely, the courts – will tell.

The Status of Common-Law Marriage in Pennsylvania

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Until January 2, 2005, a woman and a man in Pennsylvania could consider marrying each other without any type of ceremony or written documentation. There was not even any requirement that they lived together for any amount of time, despite a common belief to the contrary. Basically, if there was no reason why they could not marry, such as being too young or being currently married to someone else, they basically needed to exchange words in the present tense – without even needing witnesses – showing that they intended to establish the relationship of wife and husband, and a common-law marriage was created.

A marriage created in this way could create difficulties when one had to prove the date of the marriage or, even, its very existence. As a result, courts made an issue of the problems with marriages that could exist without any documentation. A 1998 decision from the Pennsylvania Supreme Court made clear that the common-law marriage certainly was disfavored but that the legislature would have to act to abolish the practice. Then, in 2003, due to the lack of legislative action, the Commonwealth Court took it upon itself to act in place of the legislature and decided that common-law marriage no longer existed in the Commonwealth of Pennsylvania. Unfortunately, all that this really did was to create more confusion.

With a Pennsylvania court saying one thing and the legislature saying nothing, the government needed to clarify what the law really was. Finally, the legislature passed a statute preventing anyone from attempting to create a common-law marriage beginning with the day after New Year’s Day in 2005. This did not invalidate such unions that took place through January 1, 2005, thereby ensuring that a possible common-law marriage that either the man or the woman involved asserted had occurred prior to the cutoff date still could prove troublesome. However, even with Pennsylvania’s abolition of the right to enter into a common-law marriage, problems caused by this concept remain.

Beyond the difficulties presented by a possible common-law marriage created in Pennsylvania prior to the beginning of 2005, there are problems because some states continue to permit a woman and a man to enter into this type of marriage at this point. They include Alabama, Colorado, Iowa, Kansas, Montana, New Hampshire (for inheritance purposes only), Rhode Island, South Carolina, Texas, Utah (which does add the requirement of an administrative order regarding the marriage), and Washington, D.C.  A com威而鋼
mon-law marriage from any of these states eventually could have an impact in Pennsylvania. While the reason often is thought to be the Full Faith and Credit Clause of the federal Constitution, this is not involved. Instead the concept of comity is the cause.

Through comity, states generally recognize and respect the laws of other states as long as the law is not deemed offensive to public policy in a particular state. Since Pennsylvania has long favored the institution of marriage (between men and women), it continues to recognize common-law marriage, despite the problems with proof that led to practice being abolished here, as long as the marriage occurred in one of the states where it was valid. Although it could not be created here, public policy in Pennsylvania favors marriage so it remains valid as long as it was valid from its beginning.

Therefore, a woman and a man could enter into a common-law marriage in Washington, D.C. in 2011 and then move to Pennsylvania. If the marriage was valid in the District of Columbia, the comity doctrine continues its validity here.

This means that these spouses will have the same rights and obligations that other married couples have in Pennsylvania. They will remain married until death – or until a divorce. While entering a common-law marriage has none of the formalities of a ceremonial marriage, its ending can occur only in the same way that any other marriage can end. Because a divorce is required while both spouses are alive, there can be equitable distribution of marital property. Meanwhile, the death of one of the spouses leaves the other with the same inheritance rights as any other surviving spouse in Pennsylvania has.

In addition, because the marriage is valid, there are rights to payments from the Social Security Administration that can vest when a spouse retires if they have been married for at least ten years. A common-law marriage also affects a bankruptcy. If one spouse basically has all of the debt while property, such as a residence, is owned as tenants by the entireties in Pennsylvania, then the bankruptcy law can be used to protect the house, with only the spouse with the debts filing for bankruptcy to get a fresh start by having these debts discharged. The marriage may have begun elsewhere, but – by the time that the couple has arrived in Pennsylvania – the fact that it was a common-law marriage in the beginning is of no consequence, regardless of Pennsylvania’s abolishing the right to enter into such marriages years ago.

In the next post, we will see another married couple that relocates from Washington, D.C. to Pennsylvania but finds the consequences much different. Instead of a common-law marriage, we’ll look at a couple that has gone through a ceremonial marriage after obtaining a marriage license, making the marriage much easier to prove. This won’t matter once they move to Pennsylvania, where they will be treated as if they virtually are strangers to one another. Their “problem” is that they happen to share not only their lives but also the same gender. The evolving area of law of same-sex marriage and its current (and possible future) implications in our changing society will be examined.

Diligent Preparation Is Essential When Filing for Bankruptcy

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Preparation is necessary in any area of law, but even the simplest of bankruptcy cases involves a tremendous amount of collaborative preparation between clients and attorneys. A client must provide detailed and extensive information that the attorney must review thoroughly in order to discuss the client’s options, including non-bankruptcy debt relief. Without this, the attorney cannot understand a person’s financial situation and give advice on the range of options to be considered prior to any work in preparation of a bankruptcy filing, if this action would be the best way to achieve a client’s reasonable objectives.

When bankruptcy appears to be the best choice after a thorough assessment of all possibilities, even more preparation and collaboration is required to successfully navigate this process. At its most basic level, bankruptcy involves the interplay among a person’s debts, assets, and budget. A bankruptcy should not be filed unless there is sufficient debt that can be handled through one of the various types of bankruptcy. This amount of debt is somewhat relative as it would depend on your financial situation viewed as a whole because, for example, the less income that you receive in an average month, the fewer non-bankruptcy options that will be available at any level of debt.

Meanwhile, your necessary monthly expenses (such as shelter, utilities, and food) also must be examined closely because, if these expenses generally are larger than income on average during the prior six months or more, then you need to address this problem prior to pursuing a bankruptcy. Again, this means preparation by you to provide all of the information about these financial matters so that the attorney can prepare an accurate analysis of what benefits and problems are likely if you file for bankruptcy.

As for assets, most people want to protect what they have. The attorney needs full disclosure in order to determine what might be lost if you seek the protection under a particular bankruptcy chapter. For example, a basic objective of a Chapter 7 bankruptcy is to discharge debt while protecting property through the use of exemptions. The other common type of bankruptcy for individuals involves Chapter 13 of the Bankruptcy Code. You may have fallen behind on payments of a debt for which specific property of yours acts as collateral, essentially. This could be mortgage debt that is secured by your home. What can you do? It depends on the facts of your situation. Your preparation of these facts for the attorney’s review must be thoroughly for the attorney to be able to present the realistic options that are available to you.

There is a reason that detailed preparation by both you and the attorney is emphasized here. At the beginning of any discussion of a person’s financial problems, the attorney has to see various documents to have solid foundation for developing the set of possible actions that you need to consider. Meanwhile, the attorney has to help you with this preparation by requesting the necessary information. Billing statements, loan documentation, tax returns, paystubs, bank statements, and credit reports are some of the pieces that are required to understand the situation. You and your attorney must work together to put all of the necessary pieces together.

The attorney must take the time to be sure that you are aware of the need for full and accurate disclosure. Debts owed to friends and family are debts that have to be included in a bankruptcy. The inventory of assets has to be complete so that your property can be protected to the greatest degree possible, and the attorney needs to explain how you should go about the process of placing value on all of these items, including clothing and worn-out furniture. Here, the preparation begins with the attorney and ends with you in order to get a complete picture before various schedules and forms that are included in a bankruptcy filing can be drafted. Accuracy and attention to detail are crucial during this collaborative process. Your property may be exempted, allowing you to protect it in a Chapter 7 bankruptcy. However, the attorney has to emphasize the importance of including everything that you own because anything that is not listed generally is not exempted, which means that you may lose it if you decide to file. The attorney has to be observant that things that might be overlooked are included here. Again, preparation is responsibility that falls to both you and your attorney.

In addition to information supplied by the client, the attorney has to look at outside sources, such as public records, to verify and supplement as much as possible. Also, while reviewing the provided information, the attorney must be able to spot inconsistencies in order to know what questions to ask to clarify this situation. For the attorney, preparation goes beyond filling out the forms – finding information, obtaining additional information, and explaining why this is so important are responsibilities that the attorney owes to you as the client as well as to the court. It takes a collaborative effort for end result to be successful.