It is a pleasure to serve our clients

My staff and I work very hard to provide the very best legal representation that we can for our clients. As you have seen from our reviews on Google, Avvo, and those posted on our web site, many of our clients have thanked us for our efforts in writing as well as in person.

We are humbled by our clients who offer their thanks in person, in reviews on various web sites, and by writing personal letters and notes like the one below. We are deeply appreciative of our clients’ expressions of thanks. We are encouraged that our commitment to provide representation that you can trust in a courteous, kind, and caring fashion for each and every client is noticed and noted by so many of our valued clients.

Chavez review 7-29-14

How to Avoid the Loss of Inherited 401k and IRA Funds to Creditors in Your Bankruptcy Case

You may be surprised to learn that Congress gave America a financial break in 2005. You can stash away up to about $1,245,375 in 401k/IRA accounts and still file for bankruptcy without losing any of the funds.

What can you do to protect your inheritance for someone who will be your benefactor in the future, or if you are thinking of your own estate plans and distributions, the 401k and IRA funds that you intend to gift to those who you wish to inherit your estate someday?

Limitations in Bankruptcy Cases on 401k and IRA Funds Received Thru Inheritance

There is an important limitation to this Congressional gift. Effective June 2014, any 401k or IRA funds that you receive by way of inheritance—as opposed to earning the funds yourself—are no longer exempt in a bankruptcy proceeding. In fact, a bankruptcy trustee can take inherited IRA/401k funds from you if you file for bankruptcy after the benefactor who left the funds to you dies.
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Federal Income Tax Tips for Filing, Refund Allocation, and Unpaid IRS Debt

Update: If you use TurboTax, and you’re still working on your taxes for tax year 2013, you should probably change your password. This article discusses a serious vulnerability in the web server software in use by some organizations. Take precautions to protect your information and identity.

As I write this, tax day for federal income tax year 2013 is only a few days away. You may have some unfinished business to clear up, whether it be to file your taxes for 2013, to make preparations to make for a smoother tax season next year, or to understand how to handle unpaid taxes. Let’s examine some topics that I hope you will find beneficial now and useful throughout the coming year.
Tax Return documents

Tax Preparation Software

According to an opinion piece published in the Wall Street Journal, “…more than three-fourths of all individual tax returns will be filed electronically [this year].” For those taxpayers who use their own computers and tax preparation applications, “Taxpayers who employ an accountant or other preparer have some protection from daunting penalties if the IRS finds mistakes. Software users who prepare their returns without help have little or no protection.”

Some pretty famous people have had problems, or claimed to have problems, with tax preparation software. According to the story, “During the confirmation hearings of Treasury Secretary Timothy Geithner three years ago, we learned that he failed to pay self-employment tax on income from the International Monetary Fund. Mr. Geithner partially blamed the oversight on the TurboTax software he had used…”

Today, the IRS and the tax court have not sided with taxpayers who claim “the TurboTax defense” like Secretary Geithner. In fact, the article states that, “So far the U.S. Tax Court has nearly always rejected the TurboTax defense. Only two cases have offered taxpayers penalty relief for software reliance.”

Ideas for Action

  1. The primary responsibility for accurately preparing a return with tax preparation software still resides squarely on you, the taxpayer. Careful review of your return manually remains important, especially if your tax situation is complex.

How to Fix a Botched Return

Jonnelle Marte’s column on the MarketWatch site picks up the thread, and offers a good backgrounder on when and how to fix mistakes in a previously filed income tax return. According to the article, “Tax pros say you should come clean about mistakes on your tax return as soon as possible, but exactly how you do so depends on the mistake. In fact, not all errors require filing an amended return, the Internal Revenue Service says.”

Ideas for Action

  1. Don’t file another original return on IRS form 1040. Use IRS form 1040X, even if you’re amending your return for tax year 2011.
  2. You have up to three years to refile a return that will produce a refund. The article explains the conditions that apply, and when the three year deadline ends for each tax year.
  3. Tax due situations are nothing to mess around with. If you owe a substantial amount, engaging a tax professional is a very good idea. According to the article, if the IRS discovers the error, “the government will bill you for: (1) the unpaid tax amount plus interest (currently at a 3% annual rate), (2) the additional failure-to-pay interest charge penalty (at a 6% annual rate), and (3) maybe other penalties too. But the IRS can waive penalties if you show you had a reasonable cause for the underpayment.”
  4. The article concludes by advising us to “be sure to use the current version of Form 1040X http://www.irs.gov/pub/irs-pdf/f1040x.pdf, which you can print out from the IRS website at http://www.irs.gov/. (Right now, the current version is dated December 2011.) If you need to attach corrected or additional tax forms, be sure to use the forms for the year you’re amending. For example, if you’re filing Form 1040X to claim additional itemized deductions for 2010, you’ll need to attach a corrected 2010 version of Schedule A. The IRS website has prior-year tax forms too (click on Forms and Publications; then click on Previous Years http://www.irs.gov/app/picklist/list/priorFormPublication.html).”

Budgeting

There are plenty of books, articles, software, and other media that explain how to establish a budget. Perhaps the hardest part is to commit to the plan you establish, regardless of how to implement it. At least the cost to establish a budget has gone down dramatically.

Intuit, the company behind Quicken and TurboTax, has a free online budgeting tool for families and individuals called Mint https://www.mint.com/. Intuit claims to have 7 million Mint users. The product is pretty simple to use, and may be all that you need to help you see where your money is going, and help you perform some rudimentary tax planning to avoid surprises in tax years to come.

Columnists like Dave RamseySuze Orman, and other “celebrity financial experts” all have good plans, and will sell you tools, books, and programs to manage them in some cases. Whatever approach you take, it is never too late, and never too early, to make a financial plan and follow through on it.

Ideas for Action:

  1. Always file your tax returns on time–even if you can’t pay. You can get an automatic six month extension to enable you to complete your tax return filing for the year. Here’s an article on the IRS web site with more details on the procedure.
  2. The IRS has a “Fresh Start” initiative to help struggling taxpayers. Here’s an article that describes the program.
  3. Tax problems can be complex. I may be able to help you understand your situation; I can certainly help you by discussing certain trade-offs and options concerning your situation with the IRS and bankruptcy.

If You’re Due a Federal Tax Refund

Congratulations! Your refund as a consequence for paying too much in tax withholding will hopefully arrive soon. What should you do with this windfall? I wrote an article for tax year 2012 that offers seven alternatives for allocating your refund that I recommend to you.

IRS Debt and Bankruptcy

Generally speaking, taxes are exempt from discharge through bankruptcy. However, in some cases, you can discharge an IRS debt using a Chapter 7 bankruptcy filing. The only IRS debts that can be discharged are those that are over three years old. There are certain conditions that must be met first. Read more about IRS and bankruptcy in an earlier article I posted on my site.

If All This Seems Confusing or Too Complicated, Please Call Us for Help

Tax problems can be complex. I may be able to help you understand your situation; I can certainly help you by discussing certain trade-offs and options concerning your situation with the IRS and bankruptcy. Contact my office for a free, no obligation consultation right away!

What Happens if My Chapter 13 Bankruptcy Plan is Dismissed Because I Can’t Afford the Payments?

The simple answer is that few plans should be dismissed for failure to make payments. In general, I can often secure a court order to reduce the payments and/or forgive accumulated payments. A qualified and caring Chapter 13 practitioner can and will ask the judge to “modify” the plan to meet your changed circumstances, if you make an appointment to come in and consult with us before it is too late.

A conversion to Chapter 7 bankruptcy may also be an option, or a filing a new Chapter 7 bankruptcy case after your Chapter 13 bankruptcy case is dismissed. In many cases, “straight bankruptcy”, also known as Chapter 7 bankruptcy, is preferable to long-term credit recovery.

James H. MaGee, Washington Bankruptcy Attorney

I am a qualified and caring Chapter 13 bankruptcy practitioner who can and will ask the judge to “modify” your plan to meet your changed circumstances. Make an appointment to come in and consult with us before it is too late.

Your Creditors Will Return if Your Chapter 13 Bankruptcy Plan is Dismissed

If your Chapter 13 bankruptcy plan is dismissed, either because it can’t be modified, or the modification to your Chapter 13 bankruptcy plan isn’t filed in time, eventually your creditors will return and start attempting to collect their respective debts again. Your creditors can collect again because no discharge of debts was issued since your Chapter 13 bankruptcy plan wasn’t completed.

Let’s Review Some Basics: What Is A Chapter 13 Plan?

A Chapter 13 bankruptcy plan is a “reorganization plan” where debtors make payments on their debts over a period of three to five years. Today, Chapter 13 cases are less common than Chapter 7 “straight bankruptcy” cases. In the Western Washington State area where I practice most of my cases, only about 20% of bankruptcy cases filed are Chapter 13 cases.

Higher income debtors are sometimes ineligible to file Chapter 7 bankruptcy, and must file for Chapter 13 bankruptcy in order to repay some portion of their debts. The amount of Chapter 13 bankruptcy plan payments is calculated by the application of a complex multi-page formula. I am very familiar with this formula and process, and I can help you estimate the amount of Chapter 13 bankruptcy plan payments you would be required to make in your specific circumstances.

Some lower-income debtors file a Chapter 13 case for one or more of these reasons:

  • Stop the foreclosure of your home, and catch up on missed house payments over time.
  • Reset payments with a car lender who is threatening to repossess your vehicle.
  • Repay your defaulted IRS taxes interest-free.
  • Restore your drivers’ license that was suspended for nonpayment of court fines and tickets.

Depending on income, many Chapter 13 bankruptcy cases propose to repay little if any general unsecured debts, including medical bills, defaulted obligations to landlords, and credit card debt.

Many debtors in Chapter 13 bankruptcy are good, hardworking folks who are struggling to get by financially. Some folks are “on the edge” financially, and some of their Chapter 13 bankruptcy plans do not complete. In those cases, their Chapter 13 bankruptcy plans are dismissed, and their creditors can restart collection calls and collection lawsuits against the debtors.

You Can Be Sued Once Your Bankruptcy Case Is Dismissed

A debtor who is fresh out of a failed Chapter 13 plan can be sued by creditors once their bankruptcy plan or case is dismissed when these conditions are met:

  • When the statute of limitations to file suit on a tort or breach of contract expires after the dismissal date of the Chapter 13 bankruptcy plan.
  • When the Chapter 13 plan is dismissed for the debtor’s default because of failure to make the Chapter 13 reorganization plan payments.

11 USC 108(c) (1) generally provides that bankruptcy does not interrupt the running of a statute of limitations. If the creditor had six years to file a lawsuit from the date of breach of contract, the six-year period is neither shortened nor extended by the bankruptcy as long as the Chapter 13 bankruptcy plan begins and then fails over a time period that is within that six-year statute of limitations to file suit.

An Example of the Six Year Statute Of Limitations to File Suit

Suppose that you are a debtor who breached a written contract with one of your creditors on August 1, 2009 and then after the creditor hounded you for a year, you the debtor filed Chapter 13 bankruptcy on September 1, 2010. The six-year statute of limitations to file suit to collect this debt starts on August 1, 2009. If your Chapter 13 bankruptcy case is dismissed without issuance of a discharge on September 1, 2014, due to defaults or failures in the Chapter 13 bankruptcy plan payments, the creditor still has a long time to file suit against you the debtor. The creditor can file suit as late as July 31, 2015 because the statute of limitations to file suit runs out on August 1, 2015, some six years after the breach of contract on August 1, 2009, and almost a year after the Chapter 13 bankruptcy case was dismissed for non-performance on September 1, 2014.

As we can see from the example above, the deadline to file suit to collect a debt is six years after the breach. The deadline is neither extended nor shortened due to the fact that the debtor was in bankruptcy during the six-year time period.

What Should You Do Today If Your Chapter 13 Plan Is Unaffordable or Your Circumstances Changed?

There is a lot that we can and will do to help you. Contact the Law Offices of James H. MaGee, Washington Bankruptcy Attorney today!

I Didn’t List All Of My Creditors In My Chapter 7 Bankruptcy Filing. What Will Happen to My Case?

There is a Federal Requirement to List All Debts and Claims When Filing Bankruptcy

Many people unnecessarily postpone filing for Chapter 7 bankruptcy out of fear that they cannot find a name and address for every single creditor to whom money is owed.

Similarly, other folks who have already filed a Chapter 7 case unnecessarily worry for years afterwards that a creditor may have been overlooked, and that the creditor is not clearly identified in the bankruptcy documents. They incorrectly believe that this omitted creditor can still sue and collect on the debt post-Chapter 7.

Couple listing their creditors for their bankruptcy filing

Is It Really A Big Problem If A Creditor Is Not Written Down In The Bankruptcy Paperwork, If It Is An Innocent Error?

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Learn the Secret to Saving Your Home Without Sacrificing Your Retirement Plan

Few Americans will enjoy a traditional old-school defined benefit pension during their retirement years. A defined benefit pension plan is a type of pension plan in which an employer or sponsor promises a specified monthly benefit on retirement that is predetermined by a formula based on the employee’s earnings history, tenure of service, and age, rather than depending directly on individual investment returns. Traditionally, many governmental and public entities, as well as a large number of corporations, provided defined benefit plans. Today, most employers have shifted the responsibility of retirement savings to the employee. IRAs, Roth IRAs, profit sharing plans, and 401(k) plans, among other sorts of less common accounts considered “defined contribution” accounts, make up retirement planning today. Continue Reading →

Bankruptcy in the United States: A Brief History

For most of the first 100 years after the adoption of the U.S. Constitution, bankruptcy was primarily a creditor’s remedy to the extent that it was available at all. Following the punitive English model, it was generally deemed an “equitable” remedy, even though the Constitution authorized the creation of bankruptcy statutes. Equitable remedies are judicial remedies developed by courts of equity from about the time of Henry VII to provide more flexible responses to changing social conditions than was possible in precedent-based common law.

In England as well as in most of pre-20th Century America, bankruptcy was a forced repayment plan. Bankruptcy was a state of financial affairs that creditors forced you into involuntarily; you had no choice in the matter. Bankruptcy was not voluntarily initiated by you in order to free yourself of burdensome debt as it is today. You were placed under supervision and forced to repay portions or all of your debts over many years.

The Irish Model for Bankruptcy

Until quite recently, Ireland followed this same old English model, and bankruptcies were extremely rare in Ireland. While England has significantly liberalized its bankruptcy system to something closer to the more generous 20th Century American model, Ireland kept its Victorian era approach until recently. Under the pre-reform Irish model, your creditors had to vote or agree to let you out of bankruptcy repayment when they thought you had repaid enough. I described the pre-reform Irish bankruptcy system here, and in further detail here. The Irish system is undergoing reforms largely as a result of the massive property and economic downturn in this decade.
The General Post Office at the center of DublinThe General Post Office in Dublin, a symbol of Ireland’s independence.

A Different Approach to Bankruptcy in the New World

In early America, state law receivership proceedings were more common than bankruptcies. However, with the development of the bankruptcy code in America in the 20th Century, receiverships lessened in favor of bankruptcies although receiverships and similar proceedings under state law have not disappeared.

Article I, Section 8 of the Constitution granted the US Congress the power to “Establish … uniform Laws on the subject of Bankruptcies throughout the United States.” This power was infrequently exercised, however. In the early years of the United States, bankruptcy relief was limited to merchants, and was a stick, rather than a carrot. Initiation of bankruptcy proceedings was limited to creditors and only involuntary bankruptcy proceedings were allowed. Furthermore, creditors could only force commercial debtors into bankruptcy, and the proceedings were involuntarily. Proceedings for individual consumers were not allowed in general. As was the case for commercial debtors, voluntary bankruptcy petitions for individuals were not allowed.

However, things changed with the bankruptcy Act of 1841. The commercial eligibility test was eliminated as a bankruptcy requirement, and bankruptcy was made available to individuals. For the first time, debtors were allowed to file a voluntary bankruptcy petition, instead of being subject to a creditor’s involuntary bankruptcy proceeding.

Unfortunately, for those who might have petitioned for bankruptcy at the time, the Bankruptcy Act of 1841 was short lived. It was repealed in 1843. In 1867, laws were passed that allowed voluntary petition for bankruptcy to be filed. Historically, not much is made of the 1867 changes. The next important, groundbreaking change to bankruptcy law occurred in 1898.

The Nelson Act of 1898 and the Bankruptcy Reform Act of 1978

The Nelson Act is sometimes referred to as the Bankruptcy Act of 1898. This law survived for almost 80 years, with some amendments.

After this 80 year span, Congress passed the Bankruptcy Reform Act of 1978. The revision to the law in 1978 was a very far reaching overhaul of bankruptcy. The system we have today is still largely based upon the 1978 framework.

Items that continue today from the 1978 Act are the four principal bankruptcy chapters: chapter 7, chapter 11, chapter 12 and chapter 13.

The Bankruptcy Reform Act of 1994

Bankruptcy laws were streamlined and clarified by the passed of the Bankruptcy Reform Act of 1994. This revision to bankruptcy law helped to clarify the requirements for both individual consumer bankruptcies as well as for business bankruptcies. Most bankruptcy law practitioners agree that following the 1994 Act, bankruptcy worked fairly well with relatively clear rules and standards.

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005

In 2005, Congress developed another reform. This reform was controversial, and had been advocated for beginning in 1996. On October 17, 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 came into being. One knowledgeable Judge wrote of the 2005 law: “Those responsible for the passing of the Act did all in their power to avoid the proffered input from sitting United States Bankruptcy Judges, various professors of bankruptcy law at distinguished universities, and many professional associations filled with the best of the bankruptcy lawyers in the country as to the perceived flaws in the Act. This is because the parties pushing the passage of the Act had their own agenda. It was apparently an agenda to make more money off the backs of the consumers in this country. It is not surprising, therefore, that the Act has been highly criticized across the country. In this writer’s opinion, to call the Act a ‘consumer protection’ Act is the grossest of misnomers.” These comments were made by Judge Frank R. Monroe as cited in In re Sosa, 336 B.R. 113 (Bankr. W.D. Tex. 2005) in “Chapter 11 for Individual Debtors: A Collier Monograph”, by Daniel M. Press and Brett Weiss.

How bad is the 2005 Act for consumers? Well, nearly 9 years on, we find that perhaps it is not so bad after all, and as a result, the bankruptcy remedy is available to all consumers who want to file for bankruptcy.

Income Tests and Bankruptcy Today

The 2005 Act establishes income tests that look at income over the past six months leading up to bankruptcy. However, many people still find a way to qualify, even if their income is higher.

Problem: Don’t qualify for Chapter 7 under the 2005 Act tests?

Solution: One option can be as easy as ceasing overtime or quitting your job and then filing bankruptcy a few months later.

Problem: Can’t afford to quit your job to qualify for Chapter 7 under the Chapter 7 income tests because you need the benefits and have to support your family?

Solution: File a Chapter 13 and seek a deviation from the repayment formulas under the 2010 U.S. Supreme Court case, Hamilton v. Laning. These deviations are granted relatively routinely provided there are good reasons why you need to spend less repaying your debts in Chapter 13 while spending more on your household needs.

Problem: Was your Hamilton v. Laning request to pay less under Chapter 13 rejected, and you now required to repay debts according to the income test formula?

Solution: Pay according to the income test formula for six months and then seek a plan modification to permanently reduce your payments into the 5 year chapter 13 repayment plan, enabling you to bypass the income test formulas imposed upon higher income Chapter 13 debtors.

Are there only three ways to beat the restrictions of the 2005 Act? Of course not! A qualified bankruptcy law practitioner has even more knowledge about bankruptcy law to get you the relief that you need and deserve.

How Do You Select a Qualified Washington Bankruptcy Lawyer?

Look for a bankruptcy lawyer who is a member of

  • the American Bankruptcy Institute (ABI),
  • the National Association of Consumer Bankruptcy Attorneys (NACBA), and
  • The Washington State Bar Association Debtor/Creditor Section.

Also, ask if your bankruptcy practitioner actually attends at least some of the semi-annual ABI and NACBA programs. These programs are attended by bankruptcy attorneys nationwide, are located out of state, and entail expenses for tuition, travel and accommodation. Attorneys who are “triple members” of all three organizations and who actually participate in the events sponsored by ABI and NACBA are usually among the best informed and most conscientious bankruptcy lawyers you will find in the marketplace.

I am a member of all three organizations. In doing so, I am one of the few South Puget Sound bankruptcy practitioners who makes the necessary sacrifices and investments in time, expense, and study. In addition to attending the seminars sponsored by the ABI and NACBA, I also participate in the Northwest Bankruptcy Institute educational presentations.

You or someone you know may want to turn over a new leaf, and get started towards a brighter financial future now. Call us at (253) 383-1001, or contact us through the form on our web site, in order to schedule a free, no obligation, personal consultation with me. During our meeting, I will listen to your situation, examine your options with you, and explain how and why bankruptcy may be the right choice for you. Don’t wait; stop procrastinating! Act now to regain your peace of mind right away.

Phone: (253) 383-1001

How Do Bankruptcy Exemptions Function To Protect Some Of My Property From Sale By A Bankruptcy Trustee?

What Is Meant By An Exemption In Bankruptcy?

The basic idea is that you should not lose everything you own in a bankruptcy proceeding. You should be allowed to keep clothes, furniture, household goods, retirement investments, a car, perhaps even some cash and a significant amount of home equity. The complete list is too long to include here. In other words, you should not be put out on the street without any property simply because you file for bankruptcy. In Chapter 7 “straight” or “fresh start” bankruptcy, only those items and assets that you don’t really need should be subject to sale by the bankruptcy court trustee to pay money to your creditors. The assets that you are allowed to keep in a bankruptcy filing are those items that you are entitled a “bankruptcy exemption”.

Man needs information on bankruptcy exemptions to ease his financial worries

Certain assets can be protected in a bankruptcy filing, helping you to ease your worries about life after filing bankruptcy.

In The Movies, People Lose Everything In Bankruptcy. How Much Will I Lose?

Most people don’t lose their cash, investments, or other property in bankruptcy. Most cases are what are called “no asset” cases in which there is no non-exempt property that can be taken and sold by the bankruptcy trustee. A moving van dispatched by the bankruptcy trustee happens mostly in Hollywood dramas, and does not represent the reality of filing bankruptcy.

Does The Chapter 7 “Fresh Start” Bankruptcy Trustee Really Want To Come And Take My Clothes And Household Furniture?

No. Your used clothing, furniture, and most household items are unlikely to yield any significant amount of money were they to be sold. The bankruptcy trustee is primarily after financial assets like cash, stocks and bonds that are not held in a protected ERISA qualified retirement account. Examples of a protected ERISA qualified retirement account include your 401k, IRA, pension plan, or VIP (Voluntary Investment Plan). This means that you could have many items of clothing and quite a bit of personal property when you file bankruptcy, and have nothing taken away.

Are There Other Types Of Property That The Bankruptcy Trustee Will Attempt To Take From Debtors?

In addition to the unprotected financial assets mentioned above, the Chapter 7 bankruptcy trustee will try to take the proceeds of pending personal injury actions from auto accidents, slipping and falling, dog bites, or medical malpractice/mass tort liability. You may have received a medical malpractice award if you took a bad medication or if you had a medical procedure that wrongfully injured you.

If you are thinking about filing for bankruptcy and also have a significant claim for injury caused by a car wreck, slip and fall, medical malpractice, or some other injury claim, then you should speak with an experienced bankruptcy lawyer. It isn’t that you will necessarily lose your entire award to the bankruptcy court trustee, but the trustee could take a portion of the award, and possibly pressure you to settle your claim quickly.

Why Does The Chapter 7 Trustee Try To Take Away My Personal Injury Winnings Or Other Property?

Money. The Chapter 7 trustee gets a percentage of whatever the trustee collects to pay your creditors. The trustee can also hire himself as his attorney, and can bill hourly against the funds obtained to distribute to your creditors.

Does The Chapter 13 Trustee Serve The Same Role As The Chapter 7 Trustee, And Try To Find Assets To Cash Out Or Sell In Order To Distribute Money To General Unsecured Creditors?

No, not really. The chapter 13 trustee supervises a repayment plan. In general, if you have non-exempt property that you want to keep, then you agree to pay creditors through your Chapter 13 bankruptcy plan an equal value of the non-exempt property, enabling you to keep your assets. You have up to 5 years to complete your Chapter 13 repayment plan.

If you had $10,000 in non-exempt stocks and bonds property that you did not want to liquidate and pay into your bankruptcy plan as a lump sum, then in Chapter 13, you would pay about $209 monthly for 60 months in order to shelter the $10,000 in stocks and bonds from liquidation by the Chapter 13 trustee. This is an illustrative example for purposes of this post. The variables that could apply are too technical to go into here.

What Are Your Thoughts On Bankruptcy Exemptions?

A surprising amount of assets can be sheltered. It is rare that I have a client who “loses” any property or money to a Chapter 7 bankruptcy trustee. I frequently represent clients with higher incomes and more assets. I am very skilled at navigating through Bankruptcy exemptions. I also work hard to remain current on the exemptions allowable in bankruptcy. In some categories of property, the allowable exemptions are small, and in others, they have increased.

For example, until 2007 you could only have up to $40,000 in home equity, and still file for bankruptcy without the chapter 7 bankruptcy trustee asking you to pay in some money to “buy back” your home equity. Functionally, you could have more equity, but this is difficult to explain in a blog post of reasonable length. In 2007, the allowable home equity exemption under Washington law increased to $125,000. At the same time, the allowable non-exempt equity in a motor vehicle under Washington exemptions still stands at only $3,250 per vehicle per person. In other words, a married couple can have two cars and each person can have a net equity value of $3,250. A single person can only have one vehicle with a net equity of $3,250.

In Selecting State Or Federal Exemptions, Which Is Best?

As you might expect, it depends. If you have a large amount of home equity as a Washington resident and you are filing bankruptcy in Washington, then in general you are probably best off under state exemptions. If you don’t own a home, or you have a home either without significant equity or the home is worth less than the mortgage owed on the home, then you might consider filing with Federal exemptions if they are available to you.

Washington is one of only about 15 states in the nation that allows you to select either Federal or state exemptions. This flexibility also makes the selection of exemptions tricky. Among the states that allow the bankruptcy filer to choose the type of exemption for their case, the considerations for making the choice in Washington is unusually complicated compared to the other states.

After Reading This Blog Post, Am I Fully Prepared To File My Own Bankruptcy And Work Through My Own Exemptions?

Absolutely not. This blog post is not legal advice. I wrote it to help you understand an important aspect of bankruptcy, and to help you arrive at your own set of questions that are specific to your circumstances and property ownership status. Bankruptcy law is complex, even for skilled attorneys who have practiced law for an extensive period like myself. You need to retain an experienced, qualified attorney who fully understands the Federal and state of Washington bankruptcy laws to review your exemptions and advise you. In my opinion, you should consult only with attorneys who are members of both NACBA and ABI (National Association of Consumer Bankruptcy Attorneys & the American Bankruptcy Institute). These attorneys are the types who are most likely to care enough about their clients and practice to stay as current and informed as possible. I am a member of both NACBA and ABI.

What Property Is Exempt, And What Property Can Be Taken, In Bankruptcy?

In a chapter 7 bankruptcy case, the bankruptcy trustee looks for “nonexempt” assets that the petitioner—the person filing bankruptcy—has, and that can be sold. If any “nonexempt” assets are found by the trustee’s investigation, then the trustee’s next steps are to distribute the non-exempt equity from the sale of those assets to creditors.
Man reviewing his assets

Bankruptcy exemption planning is complicated

An Example Where The Petitioner Has Excess Equity Beyond Exemptions

If your home was worth $255,000, but you owed only $100,000 on the home, then the bankruptcy trustee could demand that you pay $25,000 to the bankruptcy court. If you did not pay the $25,000, then the bankruptcy trustee could then warn you that a possible consequence of nonpayment is that you could be evicted from your home, and that the trustee could sell your home, paying you $125,000 of the proceeds. Please note that the bankruptcy trustee in this scenario is demanding $25,000 even though what is owed is about $25-30,000 in non-exempt equity. This is a common practice to get matters moving along. In our hypothetical example, after the $100,000 remaining on the mortgage was paid off, and your allowed exemption of $125,000 was paid to you, then the remaining proceeds from the sale would be distributed to creditors.

Do Chapter 7 Bankruptcy Trustees Sell Houses Regularly In Cases Like The Example Above? Is That How It Usually Works In The “Real World” Of Bankruptcy?

The answers are ”no” and “no”. In my long experience as a bankruptcy attorney, here is how I would handle a situation like this case where the amount of equity in a home exceeds the allowed exemptions. I would try to make a deal that would allow you to keep your home. If the home were sold, around 8.5% of the gross dollar amount proceeds from the sale would be consumed in realtors’ fees and closing costs. The true net proceeds to the bankruptcy estate after paying off both the mortgage and your $125,000 exemption would be only about $8,325. My offer to the bankruptcy trustee would be to accept $5,000, and to not sell the home. The chances are good that the bankruptcy trustee would accept the offer because homes can be hard to sell these days, and the time required to make the sale can vary depending on the market conditions and other factors out of the trustee’s control. While on paper the non-exempt equity available from the home appears to be $30,000, you could pay as little as $5,000 to settle the issue even though you have over $125,000 in home equity.

Homes Are Not The Only Type Of Positive Equity Asset That You May Be Able To Retain

You may be able to keep assets with positive equity value, including cars, lump sum distributions, cash value insurance, and even jewelry. For example,

  • You could have a car or truck worth a bit over $29,125 that you own outright, and still file for bankruptcy if your home has low or no equity.
  • If you received a “lump sum” Veteran’s benefit of $35,000, or your ex-husband paid you a lump-sum of $30,000 for past due child support, you can still probably file for bankruptcy without losing any of these assets.
  • You may be able to keep up to $51,450 (and maybe more) in whole life, life insurance policy value.
  • You may be able to keep $27,600 in jewelry that you and your wife own.

You may be thinking that if each asset could be kept as described above, could you keep the $125k in home equity, the paid-off vehicle valued at $29,125, the $65,000 in VA lump sum benefits and child support cash, the $51,540 in life insurance contract value, as well as the $27,600 in jewelry without loss of any of these to a Chapter 7 bankruptcy trustee?

The answer is no. While you could likely keep all of the $65,000 in cash stemming from the VA “lump sum” award and lump sum child support payment regardless of value in any other item or property, you may not be allowed to keep both the $125,000 in home equity and the paid-off vehicle valued at $29,125 and the $51,450 whole life cash loan value policy as well as the jewelry with a combined value that exceeds $27,600. However, some combination of a subset of these assets might be possible to arrange without loss of the items to the bankruptcy court trustee. For example, if some of the assets were not quite as valuable as described above, then that could work in your favor.

However, regardless of the equity in your home, vehicle, jewelry, and cash value in a life insurance policy, the $35,000 in lump sum payments of Veteran’s benefits and $30,000 in past due child support that you received as a lump sum are likely both untouchable by the bankruptcy trustee. You could successfully file bankruptcy without surrendering either the cash received from Veteran’s Benefits and past due child support or the paid-off vehicle.

As I explained, while some of the assets like the jewelry and home equity can’t both be kept in a successful bankruptcy filing, you may be able to sell the jewelry and possibly move some of the funds into either the equity in your home or the life insurance policy? This approach may be perfectly permissible as I explain below.

You may ask if it is possible to could sell your jewelry and move the money into home equity, would it also be permissible to simply give the jewelry to a relative?

The answer is no. Pre-bankruptcy exemption planning like the sale of the jewelry and transfer of the proceeds of the sale to home equity or the life insurance policy is not always impermissible, and you might be allowed to move assets in a similar fashion before filing bankruptcy. However, giving away assets to a relative is not a good idea because the bankruptcy trustee may well go to your relative to retrieve them, and even sue your relative in Federal court for the value of the jewelry. In addition, you will likely lose your exemption for the value of the jewelry. The jewelry will be sold by the bankruptcy trustee, and none of the proceeds from the sale will be returned to you. You’ll be left with no jewelry, no happy relative, and no increase in either your home equity or your life insurance policy.

Handling Bankruptcy Exemptions Properly Requires a Skilled Attorney to Protect Your Interests

Let’s review an example in which your spouse died either in an accident or due to medical malpractice. You are left with several children to raise along with $50,000 in medical bills, $40,000 in credit card debt, and $15,000 in car repossession deficiency where your car was valued below the amount of the loan you owed when it was repossessed for failure to make your car payments.

However, you received $1 million in compensation from the at-fault party’s insurer as a settlement for the loss of your spouse. You could very likely successfully file for bankruptcy against the medical bills, credit card debt, and car repossession deficiency while not surrendering any part of the $1 million wrongful death settlement to the bankruptcy court trustee in order to pay your creditors. Because bankruptcy exemptions are so complex, I can’t say that you would achieve the same result if you had significant home equity. If you had $125,000 in home equity, for example, as well as the $1 million wrongful death settlement, you might have to surrender some portion of your assets for payment to the bankruptcy trustee and creditors.

Bankruptcy Exemptions Are the Same in All Bankruptcy Chapters

If an exemption applies in a personal Chapter 7 or 11 case, then it would also apply in a Chapter 13 filing. However, if you have non-exempt equity in assets, you might consider filing either a Chapter 13 or 11 case. In either Chapter 13 or Chapter 11, you can usually “repay” the value of the non-exempt portion of your assets to your creditors, and keep the asset. For example, if you had $155,000 in home equity, you could file a Chapter 13 case and repay about $25,000 to creditors over a period of up to five years. This works out to be about a maximum of $475 monthly, including attorney’s fees and Chapter 13 Trustee’s administrative fees. Our firm would typically charge about $1,600 in attorney’s fee up front in such a case.

You may recall that earlier in this post, I described an approach in a Chapter 7 case where the homeowner has a home worth $255,000 with a mortgage balance of $100,000. I explained that the homeowner might only have to pay $5,000 cash to the bankruptcy trustee to keep the home clear of sale by the bankruptcy court trustee. The reason that I gave that this approach would work is because the net realizable non-exempt home equity after paying the costs of the sale could be as little as $8,325. Now you note in the immediately preceding paragraphs on non-exempt assets that a debtor filing Chapter 13 would have to pay back $25,000 over five years at the rate of $475 monthly if the homeowner owned a home with exactly the same equity of $255,000 and a mortgage balance of $100,000. What explains the difference?

Bankruptcy Exemption Planning May Not be the Same in All Bankruptcy Chapters

The difference is explained by the Bankruptcy Chapter under which each of the example cases is filed. The first example was under Chapter 7 rules, and the second example case was filed under Chapter 13.

Currently, there are many fewer Chapter 13 cases being filed in our area, and the Chapter 13 Trustee’s staff has more time to examine each case that is filed. For the Chapter 13 example, I gave a “worst case” maximum expense scenario of $475 monthly. However, as an experienced practitioner in Chapter 13 law, I would to try to avoid a “worst case” scenario result for your case. I would propose to pay back the home selling costs of $8,325 instead of the $25,000 in equity after the sale of the home.

The Western District of Washington Chapter 13 Trustees’ offices have been more aggressive lately, and challenge all sorts of things which previously had long been regarded as reasonable. The estimated 8.5% in costs for the sale of the home might be challenged by the Chapter 13 bankruptcy trustee. If the challenge is successful, a debtor who seeks to keep their home would have to pay $475 monthly for sixty months in order to repay the hypothetical “liquidation value” of $30,000 after the sale of the home.

Now you understand that by the most conservative calculation that I can provide, the debtor who has $25,000 to 30,000 in home equity in this example should expect to pay $475 monthly. However, if the Chapter 13 Trustee will accept the 8.5% hypothetical sales cost in the calculation that I submit with your case, then I would propose in the Chapter 13 filing to repay the $8,325 hypothetical post-sale net result over a period of 60 months. This would lower the monthly repayments to only $175.00 monthly for 60 months in order to save the home.

Bankruptcy exemption planning can be tricky, and it is a huge field. Be careful who you trust with your bankruptcy case. Failing to discuss all of your assets with an experienced, qualified bankruptcy attorney can result in a lost opportunity to shelter property and personal items from loss to the bankruptcy court trustee.

I am very experienced in the practice of bankruptcy law, and in working on complex asset management and exemption cases. If you are considering a bankruptcy filing, then I would be more than pleased to help you. We will meet in person to list your assets and allow me to explain your rights, and then develop a plan that describes how your exempt property might stay that way—exempt!

Can your family benefit from California’s unfortunate combination of poverty and aging demographics?

Recent talk at the California Economic Summit was of “two Californias”. Specifically, the more affluent coastal areas form the more economically viable “California”, while the financially struggling Inland Empire that includes cities like San Bernardino, Fresno and the San Joaquin Valley makes up a separate “California” with very different economic prospects.

But how can you benefit from California’s high poverty rate and changing demographics? Is there a lesson or an opportunity? Or both? Continue Reading →