Philadelphia Bankruptcy Lawyer Blog

One of the most common questions asked of Philadelphia Bankruptcy Attorneys is, "how much do I get to keep if I file for bankruptcy?" The answer, surprisingly, is very often "everything." While bankruptcy is a federal matter (like immigration cases or FCC violations) as opposed to a state issue (like a simple lawsuit before local Magisterial court), there is still a state element which creeps into a federal bankruptcy filing: exemptions. These are the items that are excluded from liquidation in a Chapter 7 bankruptcy (meaning you get to keep them).

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As a bankruptcy attorney, King Law Center regularly fields questions about what property one can keep when filing for Chapter 7 bankruptcy. Since Chapter 13 is known as a repayment plan, it makes sense that property owned by a debtor who files for Chapter 13 gets to keep it. But a Chapter 7 is called a liquidation, and that word connotes surrendering everything but the clothes on your back. In practice, that simply is not how it is. Most debtors keep everything they own...including their cars (whether they are paid off or not).

Continue reading "Can I Keep My Car and Other Property in a Chapter 7?" »

Anyone looking for a Berwyn, PA bankruptcy lawyer will be wise to consider the impact a Chapter 7 bankruptcy will have on their personal assets. Pennsylvania protects its citizens, as does every state to varying degrees, with a list of "exemptions" detailed in the Pennsylvania Code. The word "exemption" is used because those items exempted in the bankruptcy filing are essentially excluded from being considered part of the "bankruptcy estate."

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In yesterday's blog, I discussed bankruptcy exemptions generally and retirements account, specifically. This was done as a backdrop to today's post which discusses the argument of bankruptcy trustee Brian Mullen of Arizona - in Mullen v. Hamlin, a matter out of the Ninth Circuit Court of Appeals, on appeal from the United States Bankruptcy Court for the District of Arizona. In the case, the trustee argues that an IRA inherited by a debtor should not be exempt from inclusion within the bankruptcy estate. This means that, if the case is a Chapter 7 bankruptcy, the trustee wants to be allowed to take possession of the retirement account funds and use the money to pay off the debtor's obligations.

This stands in direct contrast to the actual letter of the law. Specifically, the Bankruptcy Code provides that "retirement funds to the extent that those funds are in a fund or account that is exempt from taxation" are exempt from seizure by the bankruptcy trustee. This is section 522(b)(3)(C) and is here if you want to look it up. The trustee makes the case that since the debtor herself did not earn or deposit the money herself into this account (that is, by working) - as it was given as a gift upon death in the will of her grandmother - it is only fair to discount the language of the statute and, instead, give the money to him, for the benefit of the creditors.

Unfortunately for the trustee, the law just does not allow for this. The original court ruling was against him. The appeals court has not ruled yet but will likely follow suit: policy arguments alone are not persuasive when they fly in the face of statutory language. The National Association of Consumer Bankruptcy Attorneys has filed a brief in the case in support of the debtor, arguing, essentially, that when the bankruptcy laws changed in 2005 with the Bankruptcy Abuse Prevention and Consumer Protection Act, Congress had the opportunity to address a wide array of issues and, in the context of exemptions, chose expressly not to limit protections, or even keep the status quo, but rather to expand the scope of exemption protections for debtors. It is a commonly understood concept in legal circles that legislative intent is to be given weight in considering appeals. Here, then, applying this broadened exemption schema, it can only be seen as a benefit to the debtors that the language of the statute says any of the enumerated tax-exempt retirement accounts is an applicable exemption.

Of course, as I have argued before, the bringing of cases, even if one knows they will lose is often a good idea for the simple fact that exposing issues is helpful. Exposing a loophole is beneficial, even if it means, in one particular case, that a guilty person goes free: in the end, the loophole gets closed (thanks to the exposure) and no additional defendants escape through the clause. This protects the greater good, although it might not feel like it when the first defendant walks. Perhaps Trustee Mullen is exposing an issue for the benefit of Congress - for indeed it is a discussion worth having if the intent is to protect worker's retirements and this particular debtor did not actually earn that retirement - but a retirement account is a retirement account. The manner of receiving it should not matter. The money cannot be acquired by the debtor until a long time in the future. This makes exposing the funds to the bankruptcy trustee an odd proposal.

Continue reading "Inherited Retirement A Bankruptcy Exemption in Philadelphia? Mullen v. Hamlin" »

Fortunately, retirement accounts like IRAs are generally fully exempt from bankruptcy liquidation. Specifically, that means that when you file for a Chapter 7 (which is known as "liquidation" despite the fact that keeping all of your property is common), you will be able to keep 100% of your retirement savings - the trustee cannot sell it to pay off your debts like they could if you filed for bankruptcy with $50,000 cash in a checking account instead, for example. The only real caveat is that the retirement account be of a particular kind. You cannot argue that your $50,000 cash you have in a savings account at your local bank is a "retirement account that I promise not to touch until I'm 65." Even if this were true, it clearly opens up the door for bankruptcy abuse and fraud. Therefore, any retirement account you have must be like the typical IRA, 401(k), or 403(b) type account. Generally, if it has tax-exempt status, it has bankruptcy-exempt status. The IRS Code details those accounts which are afforded this status.

The term "exemption," then, refers to that which is outside of your so-called bankruptcy estate. Consider that when you file for a Chapter 7, a new entity is created called "John Doe's Bankruptcy Estate" and in it goes all your assets...except those which are exempt from inclusion. The list of these exemptions includes, for the most part, your household furnishings, your clothes, your retirement accounts, and various other items as defined by statute. Some states (despite the fact that bankruptcy is a federal filing) protect their citizens differently; debtors in Pennsylvania can choose to use these state exemptions or elect to use the enumerated federal exemptions. A state like California has broad, discretionary exemptions (though no option to use the federal exemption schema) whereas a state like Oregon is a bit tighter with what it allows its citizens to exempt. Pennsylvania is in the middle and, fortunately, provides for a federal exemption option. Indeed, most Pennsylvania debtors elect to use the federal exemptions.

This John Doe's Bankruptcy Estate, if it has anything in it (again, only non-exempt assets are put in), is then sold by the bankruptcy trustee who oversees your case to provide some degree of cash payout to your listed creditors. Most filings are called "no asset" cases as there are no assets within the Bankruptcy Estate to sell and, therefore, nothing to sell for the benefit of the creditors. Incidentally, the trustee makes a few dollars off those things which are sold, which is why it behooves the trustee to be sure you have listed everything in your bankruptcy petition: they get a percentage of that which is liquidated. Any money collected by the trustee is distributed proportionally to the listed creditors based upon the size of the debt you owe them versus the overall debt that you owe.

Knowing how to maximize these exemptions is one of the key functions of a bankruptcy attorney. An experienced bankruptcy attorney can guide you to list your assets correctly and apply the appropriate exemptions to those assets (in the form called Schedule C). While you must list everything you own in your bankruptcy petition - for failure to do so constitutes fraud and subjects you to bankruptcy penalties - you should also be armed with an understanding of how to list your assets and the value to assign them. Again, a bankruptcy attorney can help you do this.