Is my IRA Protected in Bankruptcy?

Posted on August 9, 2012 by

 When considering filing for bankruptcy, many individuals are concerned that their individual retirement account, or IRA, will not be protected.  Typically, IRAs are protected through bankruptcy; however, there are certain instances when an IRA could be considered unprotected. 

 The bankruptcy code states that IRAs are protected through bankruptcy, but only if the funds are in an account that is exempt from taxation. Generally, your IRA will remain exempt from taxation, unless you have used the money in your account in a way that is prohibited by the IRS.  The Internal Revenue Code has rules that restrict what can be done with your IRA, and these rules list “prohibited transactions”; Committing one of the prohibited transactions could make your account taxable, meaning it would NOT be exempt from taxation.  

 Examples of prohibited transactions include:

 

  • using the money in the account to benefit a disqualified person (meaning yourself, your family, or your business/employees)

 

  • selling, leasing, or exchanging the property in the account with a disqualified person

 

  • lending the money or extending credit from the IRA to a disqualified person

 

The basic rule with an IRA is that you cannot receive any benefit from the money in your IRA unless it is authorized by the plan and by the law.  If your account is managed by an independent custodian (someone other than you who is impartial), engaging in prohibited transactions do not typically occur because this person will not allow them to.  However, if there is not an independent custodian of the account, you can run into trouble.  Many times, people will run into this when dealing with real estate and with attempting to roll over their account into a new account.  

 

As an example, you cannot use your IRA as collateral for a loan to purchase real estate.  This is prohibited by the IRS, and will lead to your account losing its tax exempt status. 

 

Another example of a prohibited act would be when you are rolling over your IRA from one company to another.  Many companies have a simple form that will transfer your account without you needing to do anything personally.  However, you also have the option to withdraw all of the funds from the account and transfer them yourself into the new account.  When doing this, you have 60 days to complete the roll over to the new account.  Many people are tempted, however, to take or borrow money out of the IRA during this 60 day window.  Doing this is prohibited by the IRS, and will lead to your account losing its tax exempt status. 

 

Because the IRS does not have the time or the man power to audit every single person in the United States with an IRA, many people can commit these “prohibited transactions” without ever getting caught.  Additionally, knowing that the risk of getting caught by the IRS is typically slim, many people are tempted to pull from their IRAs or use them in a way that would make them unexempt from taxation.

This is when your IRA would become unprotected when filing for bankruptcy. Despite the IRS not having the time to audit your account, the Bankruptcy Trustee most likely will.  This is because the Bankruptcy Trustee has a vested interest in finding funds to disperse to your creditors, since he or she will get a cut of that money as well.  If the Bankruptcy Trustee does an investigation of your IRA and finds that there have been prohibited transactions, he or she will object to your claim that it is protected, since the IRA will have lost its tax exempt status.  Then, if the Trustee’s objection is successful, he or she will be able to obtain the account to disperse the funds in it to your creditors. 

As stated before, typically, your IRA will be protected during your bankruptcy; however, there are some exceptions.  If you have an IRA, and you are certain that you have not engaged in any prohibited transactions, your IRA will be protected. However, if you have engaged in prohibited transactions, you could face losing your IRA by filing for certain types of bankruptcy. 

If you have questions about your IRA being protected, contact a St. Louis bankruptcy attorney today.

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Will Surrendering Property Forfeit a Debtor’s Homestead Exemption?

Posted on June 7, 2012 by
Bankruptcy Attorney St. Louis Metro Area

Bankruptcy Attorney St. Louis Metro Area (Photo credit: BankruptcyLawyerStL)

When a debtor files for a Chapter 7 bankruptcy, he or she can make use of certain exemptions. Exemptions allow a person to keep personal property, such as a home, car, pension and other personal items. Homestead exemptions can be the most significant exemptions a person can apply during the bankruptcy process, because homes typically have high value. The value of homestead exemptions can vary according to different states as well. For example, in the states of Missouri and Illinois one may claim up to $15,000 in a homestead exemption. In other states, the homestead exemptions can be much higher.

In states like Missouri, there can be some issues in attempting to claim a property under the homestead exemption. For example, a person who is also facing a foreclosure may want to transfer the homestead to the mortgage company and remain living in the home until the end of the foreclosure process. The trustee could object to this behavior and want to find that a person lacks the necessary intent to surrender a property in continuing to live in a home. Confused? On debtor’s bankruptcy petition, the debtor has to state whether he wants to surrender or reaffirm real estate (redemptions is not an option for real estate). The bankruptcy code requires that debtor’s intention must be completed within 30 days after the first set of the meeting of creditors (the 341 meeting). A trustee could argue that if debtor surrenders the house, he must move out within 30 days after the trustee’s meeting or pay rent. In addition, a homestead exemption is lost because of the surrendering of the real estate. The answer to this issue depends on in which district you live in. Court decided the issue differently. Some districts allow you to retain and to pay your real estate until the foreclosure takes place and allow you to apply your homestead exemption until foreclosure. The courts held that just through the intent surrendering your home does not make you lose your homestead exemption.

When filing to make use of a homestead exemption, one must declare whether he or she intends to keep the mortgage in existence and continue to live in the house. The home must be considered a person’s primary residence if a person wants to use the homestead exemption for filing for bankruptcy. A secondary home or vacation home may not be used with a homestead exemption. During a Chapter 7 bankruptcy proceeding, a debtor must also state whether he or she wants to surrender the property to a lender. If he or she decides to go this route, then personal liability for the mortgage note will be discharged.

Courts have ruled on this contentious issue. They have found that living in a home and attempting to transfer the homestead to a mortgage company did not amount to a surrendering of a property. Even if a debtor submits a statement with his intentions to surrender his homestead to a mortgage company in a court document, this does not mean he has to leave the property. His statement of intention to the court has no bearing on his intention in regards to the future foreclosure of his home.

This is an important distinction to understand in bankruptcy law, because it means that more people can live in their homes during the foreclosure process and bankruptcy proceeding.

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Can a Bankruptcy Be Denied?

Posted on May 31, 2012 by
When can my bankruptcy case be denied by the court?Bankruptcy Attorney St. Louis Metro Area

Bankruptcy Attorney St. Louis Metro Area (Photo credit: BankruptcyLawyerStL)

Almost all bankruptcy cases proceed without any problems and the debtor receives a discharge of his debt at the end of the case. But in some cases, a bankruptcy filing can be insufficient or the discharge of debt can be denied or revoked. Here are a few things that could cause a bankruptcy discharge to be denied by the courts.

One factor that can affect whether or not a bankruptcy discharge can be denied is one’s income. When your income is above median, that means it is higher than the average household income in your county, you have to fill out the means test in a chapter 7. If you income or the expenses are not properly calculated, and it turns out later during you bankruptcy case that you are not eligible for a chapter 7, the US Trustee’s office will file a motion to dismiss or convert to a chapter 13. The information you provide to your attorney must be accurate in order to calculate the means test and avoid problems later on.

In a chapter 13 are specific debt limits that cannot be exceeded. Often, a mortgage debt might be overlooked and not added to the combined secured debt. If a the debt exceeds the limit, the chapter 13 trustee will file a motion to dismiss or convert to a chapter 7 or chapter 11.

If the court suspects that the person has made an attempt to shield certain assets, a bankruptcy discharge can be denied. The trustee looks at any property transfers that occurred within a year’s time to friends or family members of the debtor, any property transferred other than in the ordinary course of business, and real estate transferred within 10 years before filing. If the court concludes that the property was transferred as a means to keep the property from being considered as a part of personal assets, the court can deny the bankruptcy discharge and charge debtor with fraud. This is why it is essential for one to be forthcoming about all assets during the early stages.

Concealing certain pieces of information puts a person at risk for having a bankruptcy discharge denied. The trustee does not want to uncover any hidden assets. The trustee does not like to review a person’s financial information submitted by the debtor and find it to be contrary to other information filed with the court. This is especially the case where the person’s earnings are concerned. The financial information on Schedule I should match the information on the means test, Statement of Financial Affairs and pay stubs. Often, these different sources of information do not match because a debtor changed jobs, lost his job, made more or less money. A problem occurs when the information don’t match because the information were incorrect. All of the income and asset information should be as accurate as possible to prevent the bankruptcy discharge from being denied.

Any false statement made under oath puts the case under intense scrutiny. The court wants to make sure that the individual has not made any false statement under oath during the bankruptcy proceeding. The petition is signed under the penalty of perjury and the trustee’s meeting is conducted under oath of the debtor. Honest mistakes are normally harmless and can be corrected, purposely concealing information and hide assets from creditors are problematic. Any misstatements made during the course of an audit or investigation can put the case at risk for not being discharged. False claims made within an application or under oath damages the credibility of the debtor.

A Bankruptcy discharge can be denied by the courts. Discrepancies in the paperwork, false claims made under oath, omissions, and other attempts made to conceal information about the person’s financial status put the case at risk for not being discharged. A bankruptcy discharge denial is possible if the courts feel certain attempts were made to intentionally keep the courts in the dark about a person’s finances.

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Will Bankruptcy Stop Foreclosure?

Posted on May 23, 2012 by

While some consumers have been able to avoid foreclosure through loan modification, others complain that lenders often “lose” paperwork and then deny their modification because “the application was incomplete” or the loan modification process takes so long that the mortgage company starts foreclosure proceedings at the same time.

 

In Illinois and Missouri the homestead exemption is $15,000. This is the amount you can protect from creditors. In addition to the homestead exemption you add all mortgages and liens together. That amount is often more than the value of the house. In most cases, there is no non-exempt property that has to be paid to creditors.  In a chapter 7, the bankruptcy voids the mortgage contract and allows you to reaffirm the contract with your mortgage company. In approximately half of the bankruptcy cases, the mortgage company does not send out a reaffirmation agreement on their own. If you wish to reaffirm your mortgage, contact your mortgage company and request a reaffirmation agreement.  A chapter 13 does not modify the original contract but allows you to pay any late payments over 4 years in Missouri (St. Louis area), and over 5 years in Illinois (East St. Louis area).

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What Effect Will My Bankruptcy Have on a Pending Settlement?

Posted on May 11, 2012 by

For many Americans, a pending settlement from a lawsuit, inheritance, or insurance claim is a door to a brighter, more prosperous future. A lump sum settlement brings to mind everything from luxury vacations to nicer homes, cars, and wardrobes. There’s only one problem: those pesky creditors.

 

Especially if you suffered an injury that took you off work, your bills and expenses are approaching Critical Mass. Add medical bills for the tests, treatments, therapy and medication. The proposed settlement starts looking smaller all the time.

 

But what if you declare bankruptcy before the settlement is finalized? Get rid of all the debts and make a fresh start by keeping your settlement all to yourself.

 

Bankruptcy laws require you to disclose all pending settlements, inheritances, and insurance claims. They become part of the bankruptcy estate, and the bankruptcy trustee will distribute any money he recovers to your creditors. However, your personal circumstances and the nature of the settlement will affect the judge’s decision. If the trustee determines that the claim might not be worth the time, he might abandon the interest of the estate in your claim. That means you can continue to pursue the claim and do not have to turn over any proceeds to the trustee. Some claims, such as workers’ compensation claims might be exempt from the reach of your creditors and trustee as long as the claim is not settled. Personal injury claims are more difficult. The law is not clear about whether the personal injury claim is part of the bankruptcy estate or not. A trustee might ask for the whole settlement or part of it.

 

Therefore, it is important to hire a knowledgeable, experienced bankruptcy attorney to review the facts of your case before filing with the court. For example, if your late-model vehicle was wrecked, the primary purpose of your insurance settlement may be to replace that vehicle so you have dependable transportation to get back and forth to work. Your bankruptcy attorney might advise you to replace the vehicle before filing of the bankruptcy case. After filing the claim might become part of the bankruptcy estate. However, if the settlement is compensation for an injury, medical providers may have legal claim for payment from the settlement.

 

Under no circumstances should you try to hide your pending settlement from the Bankruptcy Court. You could be charged with fraud and suffer severe penalties.

 

Should you delay filing your claim and declare bankruptcy first? Again, you should consult an experienced Bankruptcy attorney. Even after a bankruptcy has been finalized, creditors can petition the Court to reopen the case if fraud is suspected.

 

If you receive an inheritance, the trustee and your bankruptcy attorney needs to know about it. An inheritance within 180 days after filing your bankruptcy case becomes part of the bankruptcy estate. That is true even when your case is already discharged and closed. You have an ongoing duty to report an inheritance to the trustee. If the inheritance is not exempt, the trustee will reopen your case and distribute any funds to your creditors. Inform your bankruptcy attorney about a settlement as soon as you know about it. Your bankruptcy attorney will then forward the information to your case trustee.

 

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Bankruptcy Article-What is a discharge in bankruptcy? by St. Louis Bankruptcy Attorney Tobias Licker

Posted on May 11, 2012 by

The bankruptcy discharge is what releases the debtor from liability for debts. Once the debts are discharged, the debtor is no longer responsible for them.

What does discharge actually mean?

 

The discharge means that the individual is given a clean slate with all of the creditors included in the case. Once the order of discharge is signed by the judge, collections actions can no longer be taken against the debtor. In cases where secured property is concerned, the terms may actually vary. From then on, the debtor is protected from collection activity by all of the creditors listed in the case. The bankruptcy discharge represents the final step for the process. This last legal hurdle is what formally releases the individual from liability in the entire bankruptcy process.

 

When does the discharge happen?

 

The discharge actually happens when the judge signs the order releasing the debtor from liability. When the petition is signed, copies are made available to all parties included in the petition. The debtor also has access to a copy of the discharge as well. The discharge order is normally filed three months after filing of the bankruptcy petition.

 

Is it difficult to have certain types of debts included in a bankruptcy discharge?

 

Although a number of different types of debt can be included in a Chapter 7 bankruptcy, some debts cannot be included. Any outstanding debts stemming from traffic tickets have to still be paid. Individuals are still held responsible for student loan debts incurred. Alimony and child support cannot be included in a discharge for bankruptcy. Debts incurred by fraudulent means are not considered in bankruptcy cases. Depending on the year filed and the validity of the tax documentation provided, tax debts can be discharged in certain cases. Tax debts that result from the individual’s failure to file in a timely manner are generally not eligible for discharge.

How are the judgment liens handled in a bankruptcy discharge?

 

Judgment liens can be “avoided” that means wiped out as far as they “impair” an exemption. The Eastern District of Missouri this is done by your bankruptcy attorney filing a motion with the court. If you had and have real estate at the time a judgment was entered against you, it is likely that a judgment lien on your property. You might not know about it. Before you file bankruptcy, have a title company do a title search. If a lien in on your property, you bankruptcy attorney might be able to eliminate such a lien. This will be very important when you try to sell your home. All liens have to be paid and released prior to the transfer of your home to the new owner. A judgment lien can interfere with the sale of your home if it is not taken care of during your bankruptcy case.

 

The discharge is a formal court order signed by the judge signaling the end of a Chapter 7 bankruptcy proceeding. The individual no longer has any obligation to pay the debts owed to creditors included in the bankruptcy.

 

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What Property Will I Lose in Bankruptcy?

Posted on April 23, 2012 by

By St. Louis Bankruptcy Attorney Tobias Licker

Bankruptcy will wipe out your debt such as credit card and medical debt. If you find yourself in a situation where you are under a mountain of debt, filing for bankruptcy will provide you with almost immediate relief. While going through bankruptcy can help with your debt problem, it is advisable to have an experienced bankruptcy attorney to make sure you don’t lose any of your property. Because of the many misconceptions surrounding bankruptcy, most people think that you lose everything you own when filing for bankruptcy protection. In reality, the law provides certain protections in place to help consumers keep much of what they own. Bankruptcy planning, that means determining when to file bankruptcy, under which chapter, and transferring or not transferring property before filing, could save money or jeopardize the whole bankruptcy case.

Type of Bankruptcy

The type of bankruptcy that you file will have a big role in what type of property you could lose. If you file for Chapter 13 bankruptcy, you will not risk losing any of your personal property. With this type of bankruptcy protection, you just enter into a repayment plan with your creditors, which is overseen by the court and the chapter 13 trustee. If there is non-exempt property, you can continue to keep it and pay the non-exempt portion as part of your chapter 13 plan payment. No property will be “liquidated” or taken from you.

If you file for Chapter 7 bankruptcy, then you could risk losing some property if not all of your property is exempt. Your bankruptcy attorney will be able to advise you in your free consultation whether you have non-exempt property. In some situations however, unexpected assets can occur that was not anticipated when filing of the bankruptcy petition. For example an inheritance will be part of the bankruptcy estate for 180 days after filing your bankruptcy case. We see this situation every so often in our office in St. Louis, Missouri. A client inherited money or property and will have to share the non-exempt portion of the inheritance with the chapter 7 trustee. The best advice in such a situation is to cooperate with your bankruptcy attorney and trustee. You cannot transfer the property without court permission because it is technically part of the bankruptcy estate. If you case is already discharged and closed, you still have the obligation to inform your bankruptcy attorney and trustee.

If the non-exempt property is of great value, the chapter 7 trustee could sell it. However, in almost all cases, debtors don’t lose any of their property. Almost all of someone’s property can be exempt. The money that is generated from the sale is used to repay your creditors. The portion that is not being paid will be wiped out at the end of the chapter 7 bankruptcy case.

Exempt Property

What exemptions you can apply to your property depends on the state you live in. Every state has specific rules about property which you can claim as exempt from the bankruptcy proceedings. This means that anything that is considered to be exempt cannot be taken by the court or your creditors.

When your bankruptcy attorney prepares your bankruptcy petition, you will list all of your property that for which your lawyer will apply the exemption. The trustee will review the paperwork to make sure that everything is in order and correct exemptions are used. The trustee will not apply unused exemptions to your case if exemptions are not properly applied. If the trustee files an objection to exemptions and prevails with it, most often the court does not allow you to “re-arrange” exemption when they were not applied correctly in the first place.

There are many different pieces of property that you own which could be considered exempt. The rules from each state vary, so the exempt property in one state will not be the same as in another. Most states will provide you with some kind of exemption for a certain amount of equity in your house. In Missouri and Illinois where our office practice, have a $15,000 homestead exemptions to protect equity in your home. You should also be able to keep any tools that you have for your business up to a specific amount and one car up the value of $3000 in Missouri and $2,400 in Illinois. Clothing, personal items, jewelry, household furnishings, pension, IRA, 401(k)s are almost always protected in a chapter 7. If you live in the St. Louis, St. Charles, Florissant, or Metro East area and have questions about filing for bankruptcy, please do not hesitate to contact us. Our office offers a free consultation.

 

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Is It Dishonest for a Christian to Declare Bankruptcy?

Posted on April 17, 2012 by

After listening to the debtor’s Christian answering machine message, the collector left an indignant message demanding to know how a self-proclaimed Christian could steal from his creditor by not paying his bills on time.

For many people, bankruptcy is a deeply emotional decision when faced with a moral dilemma. On the one hand, we are taught to live responsibly and pay our obligations. On the other hand, sometimes it becomes impossible to meet those obligations.

For example, the most common factor in personal bankruptcies in the United States is medical bills. And while the politicians try to hammer out a solution to the healthcare crisis, the fact remains that unforeseen health issues can send a family into a financial tailspin.

Bankruptcy was established by law as a way to provide people with a fresh start in the wake of severe financial crisis. The concept of bankruptcy is rooted in the Old Testament concept of “jubilee” when debts were canceled, slaves were freed, sold properties were returned to their original owners, and everyone received a fresh start.

Are there consumers who take advantage of bankruptcy laws? We have not seen cases in which consumer actually file bankruptcy even though they were able to pay their bills. Someone who considers bankruptcy will always experience financial hardship. As more and more families become trapped by a combination of rising expenses and falling incomes, bankruptcy may be the only option. And “for most consumers, bankruptcy is not a dishonest gambit, but a desperate last chance to regain dignity and control.

For example, if you charge $200 worth of clothes on your credit card and make minimum payments on the card, how much do interest and fees add to the price of the clothes? Are you paying double for your car? Triple for your house?

And when credit becomes such an integral part of family finances, how many times can the bill be multiplied before it becomes unmanageable.

Are there creditors who take advantage of the law? Are there creditors who routinely violate the Fair Debt Collection Practices Act? Are there creditors who promptly report a ten-day delinquency on a consumer’s credit report while never mentioning years of on-time payments? Is it right for a creditor to smugly assert moral superiority over an honest consumer who just can’t make ends meet?

For most debtors, bankruptcy is a last resort. When financial problems first begin, you try to reorganize, cut expenses, and regain control. But the situation gets worse. The worse your credit gets, the harder it is to rely on short-term solutions to get past a temporary problem, and the problems begin to build. Late payments trigger late fees and higher interest rates. Bounced checks incur severe penalties. You have to pay cash for things you need that you can no longer finance. You may face repossessions or foreclosure. Finally, you consult an attorney.

The attorney advises you that bankruptcy is the best solution. And you may ultimately learn that the fresh start offered by bankruptcy allows you to make a new beginning. Historically, the jubilee was a time to celebrate a new beginning.

 

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What Is an Automatic Stay?

Posted on April 10, 2012 by

Filing for bankruptcy can offer a temporary respite from collection efforts even if you let your bankruptcy case get dismissed at some point later on.

As soon as you file your bankruptcy petition, the automatic stay goes into effect. An automatic stay is an injunction that takes effect as soon as the case is filed with the court. You do not need to file any additional documents or appear for a hearing; once you submit your petition, your creditors must cease almost all collection efforts.

Once a stay has been issued, creditors may not contact the debtor, demand repayment, file a lawsuit or attempt to seize the debtor’s property. The only option a creditor has is to file a motion for relief and argue at a hearing why the automatic stay should not apply. A common reason for a motion for relief is when a debtor wishes to keep his residence but fails to make ongoing mortgage payments.

Once the bankruptcy case is filed, the court will notify your creditors. Debt collectors who knowingly violate a stay can be sanctions after your bankruptcy attorney files a motion with the court. In almost all cases violation of the automatic stay results because of lack of notice. As soon as you creditor has notice of the bankruptcy, he normally will stop any collection efforts to avoids being sanctioned by the court. If the creditor was unaware of the stay, however, the court will not impose any sanctions. Regardless of notice, though, your creditors must return any property they seized after you filed your petition. That is also try for property that has been repossessed before filing of the bankruptcy, such as a repossession of your vehicle. After filing of a chapter 13 bankruptcy case, the creditor will have to return the vehicle back to you.

Stays do not stop collection efforts on certain types of debt, including:

  • Criminal sanctions – Criminal defendants are often ordered to pay the costs of their prosecution, fines and restitution. Automatic stays do not interrupt payment of these obligations.
  • Child and spousal support – If you are in arrears on a support order, you may still be subject to contempt proceedings and wage attachments .
  • Tax audits – While the tax authorities must wait to collect, an automatic stay does not protect you from being audited.

Automatic stays protect both you and your creditors. Imagine that a young man graduates from college and immediately falls into default on a number of credit card accounts. Aware of his rights, he contacts an attorney and files for bankruptcy. Without an automatic stay, a debt collection firm could persuade the young man to settle one of his debts by emptying his savings account. This would leave the other credit card companies penniless. With an automatic stay, however, all of the young man’s creditors must be treated equally. In a chapter 13 bankruptcy case available money will be distributed according to a plan the debtor proposes.

The automatic stay is in place as long as your bankruptcy case is ongoing. If your case is dismissed, your creditors can resume their collection efforts. If you need to refile your bankruptcy case, the automatic stay is in place for only 30 days if the previous case was dismissed within the last year. Your bankruptcy attorney will then need to file a motion to extend the automatic stay.

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