Can I keep all my assets if I file bankruptcy? (Part 3)

5 March 2012

In prior posts (2 November 2011 and 3 December 2011) we addressed this general topic; whether you can keep all your assets even after you file bankruptcy, which is asked by all those contemplating filing.  The focus was on when you would be absolutely sure you would not lose the asset.  As we discussed, you can always file (in conjunction with claiming your exemptions) and then see what happens.  As long as the assets were properly listed, you can wait until your case closes, the time of certainly.  But since ending the discussion there is not responsive (or very fun), we discussed some ways a debtor may attain certainty sooner than when the case closes.  One of those ways we discussed was to attempt to exempt “100% of FMV (fair market value)” of an asset, even when the exemption provides a fixed (maximum) dollar amount.  We now update and add to our earlier comments on the propriety of making such an exemption claim with a current event.

It is a recent decision of the Bankruptcy Appellate Panel for the First Circuit on this issue titled In re Massey decided on 27 February 2012 (BAP No. MW 11-060).  The decision runs through prior decisions from local bankruptcy courts and throughout the country on this issue and concludes “[w]e agree with the consensus which has emerged from the foregoing cases that the Debtors’ exemption claim of “100% of FMV” was facially invalid.”  It also rules that an evidentiary hearing in the bankruptcy court, which is typically held after an initial nonevidentiary hearing, was not required or necessary.  This means the Bankruptcy Appellate Panel believes the issue can properly be decided without the bankruptcy court having to consider any particular facts.  Quite to the point the court concluded there was “no legitimate reason [to claim the 100% of FMV exemption].” 

This legal controversy stems from differing opinions on the proper interpretation of Schwab v. Reilly which is an opinion of the United States Supreme Court that discusses the 100% of FMV exemption.  130 S. Ct. 2652, 2668 (2010).  Schwab v. Reilly was mentioned in our prior posts; those wanting to delve into this issue in more depth should read it.

Keep in mind, In re Massey, like other decisions issued by the Bankruptcy Appellate Panel, is not binding on other cases.  It is also too soon to know whether In re Massey will be appealed to a higher court.  However, it indicates that the legal position of claiming “100% of FMV” may not win the day in the end.  At this time, although still far from settled and the final tally is not in, so to speak, the position of claiming a 100% of FMV exemption certainly looks an underdog.  For those having studied this evolving issue and take the opposing view, In re Massey begs the question why Justice Thomas even discussed the “100% of FMV” exemption claim in Schwab v. Reilly, seemingly as a legitimate legal position to take.

Will I be able to keep all of my assets if I file for chapter 7 bankruptcy? (Part 2)

3 December 2011

As stated in the prior blog posted on 2 November 2011, we are addressing a debtor’s ability to keep his assets upon the filing of a chapter 7 bankruptcy. We stated that once the case is filed, generally your assets become part of the bankruptcy estate and are subject to liquidation. We also stated that once the case is over, whatever asset declared that was not liquidated now is the debtor’s again. So we know the date when uncertainly begins, and we know the date that certainty arrives. But how can a debtor have more assurance while the case is still open? This is the question we address now.

There are only a few options to take. Initially, one must understand that there are exemption statutes that exempt an asset in its entirety, and other exemption statutes that only provide a (maximum) dollar amount. So, one way to increase the certainly you may retain an asset is to claim an exemption in the asset under an exemption statute that exempts the asset in its entirety. There is no magic here because there has to be such a statute that applies to the particular asset.

Another way is to declare an exemption of “100% of FMV” under a statute, even if that statute has a maximum dollar amount. This way, the theory goes, if the trustee or someone else does not object, you are ensured 100% of the value of the asset even if there is a sale of the asset. Some people argue that if these is no objection that the asset itself is fully exempt and it cannot be sold. Either way, you are much more likely to keep the asset. The use of “100% of FMV” gained much attention when it was described, or some would say created, by the United States Supreme Court in its Schwab v. Reilly decision in 2010. 130 S. Ct. 2652, 2668 (2010).

However, the pro se debtor, or even experienced counsel, must beware. There are (presently) great dangers in claiming “100% of FMV.” Some trustees recently seem to be taking the position that it is improper and objecting to it as a matter of course, despite its apparent endorsement by the United States Supreme Court. And the first group of cases that have been decided indicate that the trustees are winning that battle. (That means the debtor is losing.) The war is far from over though, and it is expected by this author and others that this legal conflict will be decided on the circuit level throughout the country within the next few years.

One may think that there may not be much down side to giving it a try and seeing if the trustee objects. Keep in mind that one significant detriment to drawing an objection is that the case remains open longer. This means the closing of the case and the time (of certainty) that a debtor is guaranteed to keep his assets is delayed, which is contrary to the debtor’s initial goal.

In addition to the chance of drawing an objection from the trustee or someone else just on the basis of claiming “100% of FMV,” the propriety of the exemption statute used, its maximum amount in relation to the value of the asset, and the case as a whole, are all given more attention. Although a debtor in bankruptcy pays the price of giving up his privacy and should have nothing to hide, it is still generally not a good move to cause more scrutiny of your exemptions, and your case overall, when in bankruptcy.

So, this raises the question of whether it is worth it to claim “100% of FMV.” The answer to that question can really only be provided by a competent bankruptcy attorney who fully understands the benefits, and if those benefits outweigh the risks, after having had the chance to assess the debtor’s entire financial picture and his goals and desires.

One other option used in this overall topic of keeping assets in bankruptcy will be addressed in yet another post.

If you are contemplating bankruptcy and have an asset that is near and dear to you, or just want to know more about how to keep assets in bankruptcy, feel free to give us a call.

Can I keep my IRA if I file for bankruptcy?

21 April 2011

The answer is: most likely. The exemption scheme you choose is important. To understand the basics of what is happening with respect to assets when someone files for bankruptcy, please read the blog posted on 15 April 2011. Now that you have the introduction, we can take it to another level.

Protecting an IRA is important, as your future retirement may be at stake. Careful thought is needed. As stated in the other posting, both Massachusetts and Connecticut allow their residents to choose between: 1) bankruptcy exemptions; and 2) state exemptions and federal non-bankruptcy exemptions. In Massachusetts, state exemptions only protect IRA’s to the extent the funds are reasonably necessary for the support of the debtor or his dependents. One might be inclined to think that a substantial IRA fund would be in jeopardy under a chapter 7 filing; However, the code needs to be read carefully. In In re Euse, a recent case in Nebraska, a bankruptcy court noted that the law allowed debtors choosing the state exemption scheme to also enjoy protection of their IRA in full. No. BK10-43179-TLS, 2011 WL 294143 (Bkrtcy. D. Neb. Mar. 2, 2011). The In re Euse court observed that the bankruptcy code permitted a debtor to choose state exemptions, and had an additional provision allowing the exemption of “retirement funds to the extent those funds are exempt from taxation under specified provisions of the Internal Revenue Code.” It based this decision on an addition to the bankruptcy code made under Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 codified at 11 U.S.C. § 522(b)(3). It found this provision encompassed IRAs. In that case, the debtor was entitled to keep his entire $163K IRA.

Before you decide to make your own decision on how to apply exemptions in bankruptcy, take heed of some points. Understand that many bankruptcy decisions, including In re Euse, is not binding upon any other court. And although the court based its decision on a part of the bankruptcy code that applies whenever state exemptions are chosen, each person has a unique set of assets, financial situation, and considerations when filing bankruptcy. (The snake you are watching might not bite you, but the one you do not see might.) One should seek qualified counsel before making the decision to file for bankruptcy.

Can I keep my assets if I file for bankruptcy?

15 April 2011

The answer is: most likely, but it depends.

This, and other questions a person that is contemplating bankruptcy may have, are very important because of what is at stake -- your assets (at a minimum). To understand the answer to this question, one must understand what is in (legal) operation during a (chapter 7) bankruptcy.

When someone files for (chapter 7) bankruptcy, what is known as a “bankruptcy estate” is created. 11 U.S.C. § 541(a)(1). Basically, it includes everything a debtor has, with some rare exceptions: Best to think of it as including everything. Since (chapter 7) bankruptcy is a liquidation, assets are subject to forfeiture. The reason that most debtors are able to keep their assets is because of exemptions. Rousey v. Jacoway, 544 U.S. 320 (2005).

Exemptions are laws that protect certain assets, or a certain value of some assets, from collection by creditors. In bankruptcy, exemptions protect these assets (or a certain value of an asset) from liquidation by the chapter 7 trustee. States are allowed to choose to allow a debtor living in their state to have the choice of what set of exemptions, known as an “exemption scheme” in the profession. They can allow a debtor to choose between: 1) bankruptcy exemptions; or 2) state and federal non-bankruptcy exemptions. States may also limit their residents to only #2. Massachusetts and Connecticut are states that allow their residents to choose between #1 and #2.

Having the choice of exemption scheme is a great benefit, but making the choice is one of the most significant decisions one must make when filing. It is a decision an experienced bankruptcy lawyer should make. It can be very tricky (as the other blog posted today illustrates), and when the debtor cares a great deal about their assets, it should be done carefully. Sometimes the titles of the exemptions can be misleading because there is a legal definition associated with it that a person who does research more than simply looking at the title of the exemption will not be aware of. Applying exemptions using common everyday interpretations can be mistaken. Use great care when exempting an asset of significant value or one that has sentimental value. If you want professional help with this choice, and other choices one must make before filing a bankruptcy, feel free to give us a call.