Bankruptcy Exemptions: 10 Ways to Deal with Excess Cash

March 29, 2010 By 10 Comments

Bankruptcy lawyers occasionally are confronted with the client with more cash, or other marketable assets, worth more than the available exemptions to protect them.

Here are some things to spend that currently non exempt cash on that are exempt, or unappealing to a bankruptcy trustee:

  1. Fund IRA’s
  2. Obtain cash value life insurance up to exemption limit
  3. Repay 401(k) loans
  4. Prepay home or auto insurance
  5. Catch up on tax under-withholding
  6. Get needed medical or dental treatment
  7. Repair the things the client has
  8. Tune-up car
  9. Stock pantry &  freezer
  10. Pay down student loans, delinquent support, priority taxes

Paying down the student loan will require that the client wait 90 days to file, putting the transfer beyond the preference period look back.

Look through the list of available exemptions where you practice and look for ways the debtor can increase the value of any asset  currently worth less than the maximum exempt or acquire an asset that would be both useful and exempt going forward.  ( I generally don’t advise maximizing the exemption for a mule or a plow for instance.)

Exemption planning is an issue that is exquisitely local:  available exemptions vary from state to state and the local view of what is permissible exemption planning rather than actions to hinder delay or defraud creditors vary.

None of these suggestions, in my view, push the envelope.  But read some cases in your jurisdiction for a look at the prevailing attitude.  Talk to veteran practitioners.

It’s your job to help the client retain as much value as they can for their fresh start.

Image courtesy of Library of Congress

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Discharging Taxes in Bankruptcy: This Year’s Trap

March 11, 2010 By 4 Comments

IRS buildingIncome taxes are dischargeable in bankruptcy if they meet the three year rule; the two year rule; and the 240 day rule.

When you count back for the three year rule (the date on which the return was last due without penalty is more than three years prior to the date the bankruptcy is filed), remember that in 2007, tax returns were due on the 16th of April.

In 2007, April 15th was a Sunday, so returns were due the following day.  File your client’s case on April 16, 2010, and those taxes will not be sufficiently aged to be discharged.

My list of things never to take the client’s word for is headed by TAXES.  Get a transcript, know whether the client got an extension, then go to the calendar for the relevant year, and make sure you know when returns were due in that year.

More on taxes and the means test

When bankruptcy only part of answer to tax problem

Image courtesy of saturnism

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Do Your Bankruptcy Schedules Tell the Client’s Story?

March 1, 2010 By 1 Comment

The last check before you file your client’s bankruptcy schedules should be a step back to see if the schedules “tell the story”.  The background and the color don’t make it to schedules and SOFA, but you need to read them from the trustee’s point of view to see if they make sense and reflect the realities of the client’s life.

Things to look at before you push the button to file:

  1. Have you listed anticipated changes in income and expenses on Schedule I and J?
  2. Does the number of dependents on Schedule I match the number in the household on B-22?
  3. In Chapter 7, does Schedule J make provision for paying priority claims that will survive bankruptcy?
  4. Does SOFA account for foreclosures, lawsuits, levies and other losses of property pre petition?
  5. Do projected budgets deal with divorce, separation or relocation?

For many things in the schedules, there is not one single way to express the facts.  Focus on getting the important information or the relevant changes on paper in a way that lets the trustee know what the story is.  Add a note or attach a schedule to tell the pertinent parts of the client’s story.

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