Clients who receive Social Security, disability, or other forms of income that is exempt by reason of its source can use this tip. Leading up to a bankruptcy filing, the debtor should use other non exempt sources of income, or even assets that can’t be claimed exempt, to fund current living expenses, the fees of their attorney, and any fix up/catch up payments appropriate prior to filing.  Leave the exempt funds untouched or make those funds the last used for necessary expenditures.

The debtor must segregate the exempt income so that it can be traced from exempt source to the account in question.

Depending on the marital property laws of your state, this principle may work in cases where a non filing spouse has property that doesn’t come into the bankruptcy estate.  Again consume the cash that would otherwise be property of the estate if existing at filing, and save the separate or excluded property.

Remember that the federal, non bankruptcy exemptions apply as well to a debtor who elects the state exemptions.  Become familiar with those exemptions and use them to your client’s advantage.

More on exemption planning :  dealing with excess, non exempt cash

• Tax liens create  a secured claim in favor of the taxing authority.  That claim incurs interest at the statutory rate.
• Exemptions, bankruptcy or state, are not effective against tax liens, which are statutory liens.
• Tax liens survive a Chapter 7 discharge on the assets the debtor held at filling.
• If the tax which the lien supports is discharged, the lien does not attach to post petition acquisitions.
• If the value of the collateral is less than the tax owed, the balance of the tax debt can be either priority or unsecured, depending on the facts.
• Liens are satisfied from assets in the order they are perfected; there may be a lien that is not an allowed secured claim because the value in the debtor’s assets is already committed to a senior lien.

This is obviously just a summary of  the subject.   Develop a facility with tax issues, however, and you will stand out among bankruptcy practitioners.  If this area intrigues you, Morgan King’s Discharging Taxes in Bankruptcy is essential.

More on taxes

The 3 year Rule

The Calendar Tax Trap

Taxes and the Means Test

Why do I care what the exemptions are in any state but California?  The Bankruptcy Code! ( what other answer did you expect from me? )   BAPCPA tried to eliminate any advantage a debtor might reap by moving to a state with more generous bankruptcy exemptions than their current state. Bankruptcy Code 522(b)(3)(A) sets out the formula to determine which state’s laws are available to the debtor who has not lived in the state where the bankruptcy case is filed for two years.

But it gets more complicated. The exemption laws of  some states don’t apply beyond their borders.  But which ones are those, and how do I find out, you ask.  Go to exemptionexpress. The stated purpose of the site is to help bankruptcy lawyers

1.  To determine what exemptions (federal, state, or both) are available to that debtor;

2.  To determine what, if any, territorial limitations there may be on use of those exemptions; and

3.  To provide statutory and case law in support of those determinations.

Talk about a public service.  Thanks, John.

What to do when there’s more cash than exemption.

Image courtesy of Marxchivist

That’s because only property of the estate is potentially available to pay the client’s creditors in a bankruptcy, and some assets, by definition, are not property of the estate.  The most prominent example of value that isn’t property of the estate is a 401(k) account.  It is excluded under §541(c)(2) by reason of the anti alienation provisions of the trust.

By contrast, an IRA account lacks anti alienation provisions and it is included in property of the estate.  So, to retain the IRA, the debtor must use an exemption to protect the asset from creditors.  Perhaps the only positive thing BAPCPA introduced was a nationwide exemption for IRA accounts up to one million dollars.  See §522(n).  Retention of IRA’s is no longer a problem.

Other examples of assets not property of the estate include the debtor’s interest in a spendthrift trust, since it has an anti alienation provision, and certain contributions to college savings accounts, by terms of the statute. § 541(b)(5).

So, start your analysis by determining whether the asset in question is property of the estate, and only if the answer is yes, go looking for an exemption to protect it.