Children’s Bank Accounts and 529 Savings Plans in Bankruptcy

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      Debtors filing Massachusetts Chapter 7 and Chapter 13 bankruptcy cases are frequently concerned about their children’s bank accounts and 529 college education savings plans. The question is whether these assets must be listed in the parent’s bankruptcy filing.

For bank accounts, it depends on how the bank account was opened. If the bank account has only the debtor’s name on it there may be an issue as it would appear such an account is the debtor’s and not the child’s. It can be argued that account is held in trust for the benefit of the child, but the debtor will have to document and prove the monies are truly the child’s. An account set up under the Uniform Gift to Minors Act will mean the monies will not be part of the parent’s bankruptcy filing.

529 Education Accounts are not considered the property of the child. They belong to the individual who opened the account and is named on it. Notwithstanding, the entire balance may not be an asset of the bankruptcy estate. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 excludes from the bankruptcy estate funds contributed to a 529 savings account more than 720 days before filing the bankruptcy petition. Contributions made between 365 and 720 days before the bankruptcy filing are limited to an exclusion amount of $5,000. Amounts contributed to a 529 plan within 365 days before the bankruptcy is filed are not excluded from the debtor’s bankruptcy estate. In each instance, the amount considered is the contribution and not the account balance.

Finally, while anyone can contribute on behalf of a designated beneficiary, only amounts contributed to the accounts of a child, stepchild, grandchild, or step-grandchild of the debtor for the taxable year for which funds were placed in such account are excludable as described above.

Showtime

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I want to give the subsribers to my blog advanced notice that William DiAntonio of Dollarbill911 will partcipate in the radio show “Money Matters with Scottie McCall” to be broadcast on WBNW AM 1120, WESO 970 and WPLM AM 1390, Friday, January 29, 2010 at 5:00PM. Bill will discuss elimination and control of debt, credit counselling and bankruptcy. Stay tuned for more information shortly.

Myths In The Practice of Bankruptcy Law

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Myth 1

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) eliminated the right to file chapter 7 bankruptcy which is the discharge of debt without repayment while retaining assets.

False, False, False. I file as many chapter 7 cases now as I did prior to BAPCPA.

BAPCPA did increase the time involvement of client, attorney and trustee. The cost of filing doubled.

Myth 2

You can’t file chapter 7 bankruptcy if you have real estate, or a large value in personal property.

False. Property is a consideration in determining whether one can file chapter 7 or must file chapter 13. The consideration is the property value net of debt and whether in can be protected by available exemptions.

Myth 3

You can’t have retirement assets.

False. You can have $1,000,000 in qualified retirement plan assets. One debtor I filed had $195,000.00. He kept it all. Like many debtors he borrowed against the account. He’ll have to pay that back as originally contemplated. Other people cash their qualified retirement accounts to stave off bankruptcy. Later, they file anyway and no longer have that asset they could have saved.

Myth 4

You can’t get a discharge for gambling debt.

False. One debtor I filed a Foxwoods debt of over $10,000 that will be discharged. A different outcome may take place in other states like Nevada.

 

Myth 5

If you make a lot of money, say $100,000 you can’t file chapter 7 bankruptcy.

False. I’‘ve filed chapter 7 cases for single debtors making over $120,000 per year.

 

Myth 6

Once the bank starts foreclosure the real estate is lost.

False. First, filing a bankruptcy case will stay all collection matters. Chapter 13 plans allow for the debtor to come current by paying the arrearage over the life of the plan. A bankruptcy filing can stop a foreclosure up to the moment a Memorandum of Sale is signed.

 

Myth 7

Gamblers who suffer substantial losses can’t file bankruptcy.

False. One debtor I filed had over $60,000 in losses the year before filing. It’s important to disclose the losses.

 

Myth 8

Income you are presently earning will determine if you can file chapter 7 bankruptcy.

False. While “current monthly income” (CMI) is used to determine if one can file, that income is defined as income received and derived in the six months prior to the month of filing. This can make for bizarre results if the debtor was unemployed for a portion of that time and now has a well paying job (debtor makes out), or if the debtor had a well paying job for most of the time and is now unemployed (debtor is in a bad position).

 

Myth 9

A debtor can’t remove a mortgage or judicial lien from their primary residence.

False. I’ve filed chapter 13 plans stripping a 2nd and 3rd mortgages. The key is their must not be one dollar of security in the mortgages being stripped.

Judicial liens are dissolved by motion in bankruptcy court when they impinge on the debtor’s exempt interest. Recording of the allowed motion in the registry of deeds is required.

How to Ruin a Good Bankruptcy Case

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Over the past year, I’ve encountered a good number of clients who had bankruptcy cases that would have had no issues, until they decided to unilaterally take financial action without the advice and consent of a Massachusetts bankruptcy attorney. In taking their unilateral action they often badly damaged or substantially delayed their potential Chapter 7 or Chapter 13 bankruptcy filing. I want to describe some of these cases in this post with the hope that future clients will not make the same mistakes.

When an individual is experiencing debt problems they often transfer assets from their name to a relative. They mistakenly believe they are removing the asset from the reach of creditors. I’ve had clients who deeded their interests in real estate, or transferred their motor vehicle title to relatives without payment of fair market value being received for the transfers. These transfers must be disclosed on the bankruptcy petition and the trustee can seek return of the property to the bankruptcy estate. Never make these transfers prior to filing a bankruptcy case.

Similarly, many clients have struggled with their budget and have borrowed money from family members. The payments to family members whether for loans or gifts made in the last year must be disclosed in the bankruptcy filing. The Trustee can pursue reimbursement of these monies. Plan accordingly when timing your bankruptcy filing.

Sometimes potential clients have taken money from their 401(k) and other retirement assets to live on, and pay unsecured creditors who would have been discharged. They are postponing a filing. This disbursement usually does not create a problem in filing the case (although it might). Primarily, it is unfortunate that the retirement account money could have been protected and retained by the client if the bankruptcy had been filed prior to the distribution. The funds lost could have been saved.

Never run debt, including credit cards up immediately prior to filing. When you borrow money, even by buying with a credit card, and don’t intend to pay it back, that is fraud. That type of debt may not end up being discharged. Certainly, luxury items worth more than $500 purchased 90 days prior to filing and cash advances of $750 or more taken 70 days before filing are presumed not dischargeable.

Some clients have payed off secured debt believing that they are improving their monthly budget. Secured debt may have a positive impact on the Means Test being passed and the client being able to file a Chapter 7 case. Also, by paying off secured debt the client might increase equity in the asset beyond the amount which can be protected. Before paying of secured debt items consult a Massachusetts bankruptcy attorney.

Finally, don’t transfer balances from one credit card to another. This may result in a situation where some of the credit card debt is not discharged in bankruptcy

For people experiencing difficulties with debt and who might need to seek debt relief, it’s always wise the seek a bankruptcy consultation with an attorney before taking action with your financial affairs on your own.

It’s Alive! Chapter 7 Bankruptcy After BAPCPA

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Mark Twain once traveled to Europe where he learned that his obituary had been published in the New York Journal. Twain responded by saying that “reports of my death are greatly exaggerated.” After the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) was signed into law by President Bush an impression developed among the general public that Chapter 7 Bankruptcy was dead. The credit industry encouraged the perception that individuals would no longer be able to discharge their debts, but instead would have to repay at least a portion of them in Chapter 13 cases pursuant to a plan. I am happy to report that reports of the death of Chapter 7 bankruptcy are greatly exaggerated.

In the several months preceding October 17, 2008, when BAPCPA became effective, Chapter 7 bankruptcy filings rose dramatically. Individuals rushed to file their cases under the pre-BAPCPA law. Their fear was they would not be eligible to file under BAPCPA. They also did not wish to be subject to numerous new burdens imposed by the new law, or the increased expense of filing which would surely accompany the implementation of the law. Lundquist Consulting Inc., a California financial research firm that tracks bankruptcy data from the nation’s courts reported 479,430 cases were filed in the week before the October 17 implementation date! In the month after the new bankruptcy law took effect, the number of Americans filing for protection from their creditors slowed to a trickle, running at one-tenth the normal number of filings. Lundquist Consulting reported 3,600 cases were filed in the first month following implementation of BAPCPA. In a normal pre-BAPCPA week, about 30,000 cases were filed.

BAPCPA introduced numerous changes in how individuals file bankruptcy cases and in the procedures to be followed. Elimination of Chapter 7 liquidation was not a change in the new law.

A few of BAPCPA’s major changes to the law are:

Credit Counseling is required before an individual can file a Chapter 7 or Chapter 13 bankruptcy case. The debtor must complete a course on the phone or on-line provided by a vendor approved by the United States Trustee. The course takes approximately 45 to 90 minutes to complete. The course must be taken before the petition is filed, but no more than 180 days prior to filing. A second course, in Financial Management, must be taken before a discharge will issue.

Debtors must now provide copies of federal tax returns from the last year filed to the Trustee. Returns from previous years must be filed. Copies of pay-stubs or reports for the 60 days preceding the filing must also be given to the Trustee.

The time between filing Chapter 7 bankruptcy cases was changed from six years to eight. Filing a case any earlier will result in no discharge.

Homestead exemptions were capped by BAPCPA at $125,000, unless the debtor has owned the property for more than1215 days in which case the state’s homestead exemption amount will apply without limitation. The Massachusetts Homestead limit is $500,000.00.

A debtor must live in a state for the 730 days prior to filing bankruptcy to be entitled to claim that states exemptions. The state the debtor was domiciled in the most in the period from 730 days to 910 days ago is the state whose exemptions can be used.

Cash advances totaling more than $750 on a credit card within 70 days of filing are presumed to be non-dischargeable. In addition, charges of luxury goods or services totaling more than $500.00 on a credit card within 90 days of filing are presumed non-dischargeable.

A Median Income/Means Test is implemented to determine eligibility for filing a Chapter 7 case. The Median Income Test allows debtor’s whose Current Monthly Income (CMI) is less than their state’s median income for their household size, to file Chapter 7 bankruptcy. CMI is the average gross monthly income for the preceding six calendar months before filing. For example, a June 16 filing would use income from December 1 to May 31. CMI includes income from all sources except Social Security and most likely unemployment. The test has nothing to do with what the debtor is actually earning. The debtor might be unemployed and earning zero at filing, but his CMI could be very high if he were employed the preceding six months. In Massachusetts the median income for a household of one is $51,176.00, for a household of two is $61,293.00, for a household of three is $75,801 and a household of four is $89,347.00. Implementation of this means test is what the credit industry believed would create a reduction in Chapter 7 bankruptcy filings. If the debtor’s income exceeds the median income for his state and family size, the debtor must perform a Means Test to determine his disposable net income (DNI). Allowable expenses (most of which are from the IRS Collection Standards) are subtracted from CMI. If the resulting DNI is less than $100.00, the debtor can file Chapter 7 bankruptcy. If DNI exceeds $166.66, the debtor probably cannot file a Chapter 7 case. DNI between these to amounts will allow a Chapter 7 filing if the DNI amount is less than 25% of non-priority unsecured debt. If a debtor fails both the Median Income and Means Tests, there is a presumption that the filing of a Chapter 7 case is an abuse.

In my experience as a Massachusetts bankruptcy law lawyer over the last three years, the majority of clients that could have filed their Chapter case under pre-BAPCPA law can still file them under post-BAPCPA.

Reaffirming Car Loans in Massachusetts Bankruptcy

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In 2005, Congress passed the “Bankruptcy Abuse Prevention Act” otherwise known by the acronym “BAPCPA”. Under BAPCPA, Massachusetts debtors have three options allowed by federal law in regard to their car loans. The first is to surrender their automobile. Returning the vehicle to the lender relieves the debtor of any further responsibility for the debt after the debtor’s discharge issues. For many people this is not an option. Most people need their vehicle for transportation to and from work, and to manage normal household errands. A second allowed option is to reaffirm the car loan. Reaffirming a loan requires signing a document called a Reaffirmation Agreement. Reaffirmation Agreements make the debtor permanently liable for the car loan. The bankruptcy discharge will offer no protection from collection on the reaffirmed loan. Therefore, if payments become unmanageable, or the debtor chooses no longer to pay the loan for any other reason, the lender may repossess the vehicle and then sue for the balance still owed. Because Reaffirmation Agreements impose a burden on the debtor’s fresh start in bankruptcy they require approval of the Court. A third option is to redeem the vehicle, which is to pay the lender the value of the collateral. This option is rarely realistic.

Another option, called retain and pay, would allow debtors to keep the car and simply keep making their payments. If the payments remain current, then the debtor can keep the car without the onerous liability afforded by the Reaffirmation Agreement. Under this choice, if the debtor fell behind in payments on the car loan and the vehicle was repossessed, the debtor would not be personally liable for any deficiency. Retain and pay is not an option recognized in the First Circuit of which Massachusetts is a part. If retain and pay is claimed, a creditor may challege it.

Fortunately, Massachusetts residents may have a trump card to help with this conundrum. Massachusetts General Laws, Chapter 255B, Section 20A seemingly prohibits repossession of motor vehicles for a non-monetary default. For Massachusetts debtors current in their payments, this law may provide an avenue to keep their vehicle by keeping their payments current without reaffirming the loan. While a creditor might obtain relief from the bankruptcy stay to repossess such a vehicle, state law would then seem to bar that repossession. Coupled with the Massachusetts Consumer Protection Statute, Massachusetts General Laws Chapter 93A, this statute can be a tremendous asset to the debtor. The debtor’s argument under the statute is the vehicle is worth the same today whether or not a bankruptcy case was filed. The filing did not diminish the vehicle’s value, the payments are current and therefore no repossession can occur.

Is the United States Heading for Bankruptcy?

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      David Walker is the Contoller General of the United States. It’s his job to oversee and audit spending by the United States government. He presents the position that our current standard of living in the United States is not maintainable. He has urged elected officials to review his calculations and take affirmative action to avert the on-coming economic disaster. When no one listened to this particular “incovenient truth” he started touring the country and speaking about the problem.

The problem is that we are spending more than we earn, charging the deficit and hoping it can be paid in the future. We are running huge deficits that are getting worse. The difficulty lies in massive entitlements combining with baby boomers coming of age to collect on those entitlements. If we do nothing to fix this problem by the year 2040, Walker calculates that the United States will only be able to pay some entitlements, interest on it’s debt and not much more. That’s right, no national defense spending, no homeland security budget and no funding for education.

Health care is the most significant problem Congress needs to address. Medicare is a much greater problem than social security. Health expenses are growing at a rate of two times inflation.

Walker’s concusion is that if we don’t act to curb health costs by reforming the system the country will be bankrupt.

Maybe we should send our President and Congressmen to the same credit counseling and financial management courses they mandated for consumer debtors.

To see Mr. Walker discuss his crusade click below: