Placing assets into a trust

As I’ve written here before, a Chapter 7 Bankruptcy is a “liquidation” bankruptcy both in that your debt is liquidated, or discharged, and in that there is a possibility that your assets will be liquidated during the bankruptcy process. A Trustee assigned to your Chapter 7 Bankruptcy case by the Bankruptcy Court has the duty of seizing and liquidating personal assets that are valued above the limits of the protective exemptions provided by the Bankruptcy Code statute. While, in most Chapter 7 Bankrutpcies, these exemptions are sufficient to cover everything a typical household generally has, some higher earning or higher asset households may include assets that cannot be protected with the available protective exemptions. Thus, in a Chapter 7 Bankruptcy, those assets are subject to seizure and sale for the benefit of the filing person’s creditors by the Bankruptcy Trustee.

How to protect such assets and still file Chapter 7? The short answer is that there is no easy answer and that, in such situations, it is highly likely, depending on how much you desire to retain the property in question, that a Chapter 13 Bankruptcy, in which no assets are liquidated, is the proper course of action.

Among the “easy answers” that I often encounter among prospective clients is the placement of such assets into a trust. However, the protective quality of a trust will vary greatly depending upon the nature and purpose of the trust, its specific provisions, and state law.

Section 541(c)(2) of the Bankruptcy Code excludes from the “bankrutpcy estate” from which the Trustee may liquidate assets property of a trust that is subject to a restriction on transfer on applicable state law. In Michigan, the new Michigan Trust Code made effective on April 1, 2010 specifically allows for so-called “spendthrift trusts,” which protect property left via a trust to a beneficiary from the beneficiary’s creditors. Thus, if you are the beneficiary a spendthrift trust, in Michigan, your property is safe from the Trustee’s liquidation in Chapter 7 Bankruptcy because it is non-transferable to creditors.

However, placing property in a trust which is does not very specifically contain an explicity “spendthrift clause” or in preparation for your own bankruptcy will not protect your property in your bankruptcy. The spendthrift trust will protect only the beneficiary’s interest in the trust.

Short of that, property in a trust must be exempted and protected as any property owned by a filing bankruptcy debtor must, subject to valuation limitations of the available exemptions.

If you are a southeast Michigan resident and are considering filing for bankruptcy, please contact me at (866) 674-2317 or john@hillalaw.com to schedule a free, initial consultation.

However, some cases are “asset” cases that do involve a transfer of assets from the filing individual’s ownership to the creditors whose debts he or she is discharging by way of the Chapter 7 Trustee assigned to the case, whose job is to do just that.

Sometimes, however, a filing individual does have more property or more cash assets in their possession than the exemptions in the Bankruptcy Code allow me to protect. (The exemptions are bits of the Bankruptcy Code statute that allow me to remove up to certain dollar-amounts of certain types of property from that legal “bankruptcy estate” containing otherwise everything the individual owns or is owed at the timing of the filing of the case.) These cases are called “asset” cases.

Usually, the available bankruptcy exemptions are sufficient to protect, if not ALL of somebody’s property, nearly all of it and what the Trustee manages to liquidate and distribute to creditors is less than what the individual owes to their creditors. This is sometimes only a few thousand dollars or less, which may be a small price for the individual to pay to discharge and walk away from tens of thousands or hundreds of thousands of dollars’ worth of debt.

Occasionally, however, the asset liquidated by the Trustee may be quite valuable. On extremely rare occasions, its value may outstrip the total dollar amount owed to the individual’s creditors.

Of course, this is rare because the calculation by the filing individual of the worthwhileness of the bankruptcy’s filing in the first place may be premised upon the fact that they will lose less to the Bankrutpcy Trustee than they owe; if they could simply sell off a valuable asset in order to pay creditors off and avoid bankruptcy in the first place, this is generally preferable. When this occurs, it may be because a filing individual has underestimated the value of an asset, did not realize that they owned it in the first place (e.g., a piece of real estate titled to them by an elderly relative without their knowledge, etc.), or for other reasons.

What happens then?

The Trustee takes a small percentage of the amount distributed to creditors, naturally. After that, however, Section 726 of the Bankruptcy Code governs how creditors are paid and in what order. Creditors are paid by the Trustee according to the timing of the claims that they file with the Bankruptcy Court when the Trustee alerts them that there is an asset to be distributed and according to their classification as “secured” creditors (holding debts with collateral attached to them) or “unsecured” creditors (holding debts with no collateral attached to them). Interest owed is paid as well, under certain circumstances.

However, after all creditors have been paid in accordance with Section 726, the Debtor him- or herself (i.e., the individual who filed the bankruptcy) is then paid.

In other words, you can only pay 100% of what you owe–and no more. If an asset liquidated by the Trustee brings more money to the Trustee for distribution to creditors than those creditors are actually owed, the filing individual will get money back from the Trustee. Eventually. (This distribution process can take months or years to complete.)

If you are a southeast Michigan resident and are considering filing for bankruptcy, please contact me at (866) 674-2317 or john@hillalaw.com to schedule a free, initial consultation.

A business owned by an individual filing for bankruptcy

Depending upon the type of business, its size, its assets, its liabilities, its corporate form, and especially depending upon whether the individual operating would like to continue the business’ operation or just shut it down, business ownership in bankruptcy can be extremely problematic.

This is particularly true in a Chapter 7 context. In a Chapter 7 bankruptcy, the Trustee assigned to a case by the court has the duty to seize and liquidate all unprotected (non-exempt) assets of the filing individual. With regard to the Federal exemptions available to protect property, a fairly low exemption of just over $11,000 must cover bank account balances, expected or received tax refunds, stocks that are not in a qualified retirement plan, and miscellaneous personal property from guns to comic book collections to … businesses.

This is obviously not a lot of money to go around, and, given that the Trustee otherwise has the right to operate or liquidate a business owned by a filing debtor, a business that is a going concern is very often a good reason to look to a Chapter 13 rather than a Chapter 7, as personal property is not seized or liquidated in a Chapter 13.

In either case, however, it is important to properly value the business. For a small, personal service-based business, the value of the business without the individual running it (i.e., after Trustee has seized the business) may be very low or even nothing at all. A business which does have assets should carefully draft a balance sheet listing those assets against any business debts owed. Depreciation and other tax-related terms of art or valuation should not be used; the same liquidation- or “garage sale”-level of value for individual assets of other sorts in bankruptcy is the proper valuation.

Thus, for example, a small business which has assets of $5,000 and owes $2,500 is worth $2,500 for bankruptcy purposes. Depending upon the other personal assets of the individual filing the bankruptcy, this $2,500 may be easy to protect. When the value rises higher, it may be that the value is impossible to protect and a Chapter 13 will be required to allow the individual to operate the business going forward from the bankruptcy.

This is very simplistic, however, and the factors which may complicate this formula are many. No business owner should consider bankruptcy without the assistance of an experienced bankruptcy attorney.

If you are a southeast Michigan resident and are considering filing for bankruptcy, please contact me at (866) 674-2317 or john@hillalaw.com to schedule a free, initial consultation.

Personal injury settlements may be awarded by Michigan district or circuit courts for different purposes: lost wage replacement, medical expense damages, caretaker or nursing services, and punitive damages, to name a few settlement categorizations. Depending upon which of these categorizations applies to a specific sum of settlement funds, the settlement may or may not be protectible in bankruptcy.

First, what does it mean to be “protected” in bankruptcy? I have discussed the process of exemption of personal assets in a number of different posts on this blog. To be “protected,” particularly in a Chapter 7 bankruptcy, means that the value of the asset is not so much that the “exemptions” provided for in the Bankruptcy Code are not insufficient to remove that value entirely from the legal “bankruptcy estate” that is created upon the filing of a bankruptcy petition so that the bankruptcy trustee assigned to the case by the Bankruptcy Court does not have jurisdiction to seize and liquidate it.

In other words, certain types of property up to certain dollar-amount values are protected from the seizure-and-liquidation power. Everything else in a Chapter 7 bankruptcy is subject to being seized and sold off by the bankruptcy trustee for the benefit of the creditors whose debts are to be discharged.

With regard to personal injury settlements, the Bankruptcy Code includes an exemption of $21, 625.00. This exemption may be used to protect any of the settlement categories described above—but only to a maximum of that amount. A $30,000.00 pain and suffering compensation settlement amount would thus be unprotected to the extent of $8,375.00.

Additional exemptions apply specifically to other categories and only to those categories. For example, there is a no-ceiling exemption that applies to compensation in replacement of lost future wages (also useful for the protection of worker’s compensation settlements). If an overall personal injury settlement of, for example, $100,000.00 included a lost wages replacement of $50,000.00 only, this exemption would protect only the $50,000.00.

In addition, successful application of these and other exemptions and protections may be significantly easier to execute if the bankruptcy is filed while the claim is still just that—a claim—rather than afterward, when it is a liquid lump sum of cash sitting in a bank account.

If you are a southeast Michigan resident and are considering filing for bankruptcy, please contact me at (866) 674-2317 or john@hillalaw.com to schedule a free, initial consultation.

It is very common for potential bankruptcy filers

Credit unions can be wonderful to deal with as a customer on a day-to-day basis. People like the friendly, personal service they often receive and, to some extent, the notion that they are not simply “customers” but are “members” of the credit union. There is an intimation of fellowship to doing business with a credit union, in other words, and many credit union members who come to me for advice regarding a potential bankruptcy are dedicated fans of their credit unions.

That friendly attitude that credit unions project on a day-to-day basis changes dramatically when one of their customers to whom they have extended credit files for bankruptcy. At that point, the credit unions become the tiger in the room.

Specifically, credit unions have the right to set off any funds in your personal accounts with them to compensate for the loss of funds owed to them by your bankruptcy discharge. Credit unions are protected in their right to do this by the Bankruptcy Code, and they will typically not wait until you receive your discharge to take your money. As a result, I advise my clients to move all of their money, save $5 or $10, from these accounts prior to filing the bankruptcy petition. Of course, we will still list and account for these funds, whether they are in a bank account or (unwisely) stuffed into a coffee can, but, at the time of a bankruptcy petition filing, anywhere is better than in a credit union account.

In addition, in the Eastern District of Michigan, where I practice, the credit unions are among the only creditors that keep lawyers down at the bankruptcy court all day, every day. When it comes to reaffirmation agreements for auto loans, among other issues, the credit unions, who all employ the same two or so creditors’ law firms in the Detroit area, have a standard operating procedure that is not “customer friendly.”

Many of my potential clients tell me, “I love my credit union” or “I’ve been working with the same people at my credit union for years.” They understandably want to keep these relationships solid. However, once you file for bankruptcy, that friendly face at your local branch is not the decision-maker, and you will not receive the same treatment going forward.

If you are a southeast Michigan resident and are considering filing for bankruptcy, please contact me at (866) 674-2317 or john@hillalaw.com to schedule a free, initial consultation.

Your discharge shows up in the mail,

Most of the time, this is the right way to feel when you receive your discharge. However, some of the time, it’s still too soon to celebrate.

Contrary to popular belief, a bankrupcy case is not closed automatically when the discharge is issued. That is indeed the point in time where you can more or less feel secure in the fact that you are permanently free of the obligation to repay your pre-bankrutpcy debts. However, particularly with regard to the Trustee, the discharge does not necessarily mean that the case is closed and that everyone is done with you yet.

If the Trustee has recovered an asset from your bankruptcy estate and is in the process of liquidating it and distributing the proceeds to creditors, the case can remain open potentially for months after discharge while all of this occurs. With your discharge in hand, this may not sound particularly problematic, but, so long as the case remains “open,” it remains possible for the Trustee or creditors to file motions and conduct other actions that you might just as well prefer that they no longer do.

Additionally, if, after your bankruptcy, you have an interest in selling your home (short-sale or otherwise) or modifying your mortgage, you cannot do so without the Trustee’s approval. So long as the case is open and the Trustee has not explicitly, via a notice filed with the court, abandoned your assets, the Trustee remains the administrator of the bankruptcy estate, which contains all of your property. In short, you do not have the authority to sell your own house until the Trustee is done with it, and the bankruptcy case is closed.

Your bankruptcy attorney, if he or she is providing quality customer service, should be able to keep you abreast of when your case actually closes, as opposed to simply calling it quits once the discharge is issued. At a certain point, if the Trustee is not closing the case, it may be that your attorney needs to push the point with him or her and file a motion forcing the Trustee to abandon the assets for which the case is being kept open, or pursue other, proactive actions. Keeping you informed of such things is part of the service that we ought to be providing.

If you are a southeast Michigan resident and are considering filing for bankruptcy, please contact me at (866) 674-2317 or john@hillalaw.com to schedule a free, initial consultation.

If you are preparing to file for bankruptcy

First, what you cannot do with a stockpile of cash:

• Repay personal loans to family members, friends, or personal business associates if the repayment would bring the amount repaid to that creditor for that debt to $600 or more for the year prior to the filing of your bankruptcy petition
• Transfer the funds to someone else’s bank account without accounting for it on your own bankruptcy petition in that new “location”
• Gift the funds to family members or friends
• Repay commercial debts if the repayment would bring the amount repaid to that creditor for that debt to $600 or more for the 90-day period prior to the filing of your bankruptcy petition

What you can do to reduce cash balances on hand prior to filing for bankruptcy are some other, basic steps that do not involve making a “preferential payment” a creditor, hiding or concealing the asset, or fraudulently transferring the asset. Primarily, these steps are:

• Paying your attorney fee and the bankruptcy case filing-fee
• Opening an IRA and depositing the maximum allowable amount
• Catching up mortgage and car payments—and then waiting 90 days before filing your bankruptcy petition
• Buying groceries, household supplies, and other non-”luxury” needed goods
• Making needed automobile and home repairs
• Getting needed medical or dental care treatment
• Prepaying home or auto insurance
• Paying down student loan and income tax debt or delinquent child support or alimony payments

Or, finally, simply living off of the money, paying for groceries, rent, and other standard household expenses until the lump-sum total of the cash balance that you have on hand is low enough that your attorney can exempt it and protect it from liquidation by the Trustee. This is, of course, not an option for those who are in need of the protection of the bankrutpcy Automatic Stay from immediate lawsuits, garnishments, foreclosures, repossessions, or other collection actions. For others, however, a little patience may be in order.

If you are a southeast Michigan resident and are considering filing for bankruptcy, please contact me at (866) 674-2317 or john@hillalaw.com to schedule a free, initial consultation.

Either way, transferring property in this manner can cause a great deal of difficulty when it comes to filing for bankruptcy afterward.

I’ll address the “estate-planning” reasoning first: have a proper estate planning document drafted by an experienced attorney to ensure that your property is administrated according to your wishes after your death. Quit-claiming a 50% interest in your home to a loved one prior to your death, for example, is a less than airtight way to ensure that that loved one receives the home and, further, can complicate the financial life of that loved one prior to your death. If that loved one needs to file for bankruptcy, suddenly, they now ”own” 50% of a piece of property that must be protected from liquidation in the bankruptcy. There may be taxable issues as well for that loved one.

Transferring assets to evade creditors is a bad idea for a few different reasons.

First, it simply does not work particularly well. Such transfers are fairly obvious to spot on the record and can be unwound by creditors. Such transfers may generally (and rightfully) be considered a fraudulent conveyance, which, by definition, is a transfer of property made for the purpose of evading creditors, depending on state statute.

Second, with particular regard to bankrutpcy, all transfers of property within 2 years of filing a bankruptcy petition must be reported on your bankruptcy petition. If the transfer looks or smells like it has been done in order to evade the liquidating power of a Chapter 7 bankruptcy trustee, a Federal criminal charge of Bankruptcy Fraud can be raised, not to mention the possibility of having the transfer declared fraudulent in a court action by the trustee and the property liquidated anyway, or the possibility of having the bankruptcy petition dismissed.

In short, if there is any possibility that you will bankruptcy within the next two years, do not transfer, quitclaim, assign, or otherwise dispose of assets. For most people, virtually all property can be protected in a bankruptcy. In the smaller percentage of cases where this is not possible, it always better to make a decision to file bankruptcy with the full financial consequences at hand, as they genuinely stand in reality.

If you are a southeast Michigan resident and are considering filing for bankruptcy, please contact me at (866) 674-2317 or john@hillalaw.com to schedule a free, initial consultation.

For bankruptcy purposes, a retirement account such as an IRA or 401(k) is simply a type of personal property, and, as with other types of personal property, such as an automobile, there is an exemption available in the Bankruptcy Code for it. (Actually, depending on what type of account you have, there are a couple of different exemptions available.) Unlike a car or your jewelry, however, the exemptions available for most retirement accounts is not capped at a certain value-level. Under the Federal exemptions, for example, you can exempt only $3225.00 in value for an automobile. Under the same set of exemptions, on the other hand, you can exempt ALL of the retirement funds that are in a fund or account that is exempt from taxation under section 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code.

There are certain exceptions to the exempt status of retirement accounts, particularly if they are subject to the repayment of federal income taxes, or, if using the state rather than Federal exemptions in Michigan, where I practice, if the retirement accounts are subject to a repayment order for child-support or other domestic support obligations.

But, in short, if you are considering filing for bankruptcy, your retirement account is, for the most part, not something you need to worry about losing. Further, if you are considering drawing upon your otherwise-exempt retirement account to pay off debt that is dischargeable in bankruptcy, you should consult a bankruptcy attorney before taking such an action. You may be sacrificing a secure future for a short-term delaying of the inevitable.

If you are a southeast Michigan resident and are considering filing for bankruptcy, please contact me at (866) 674-2317 or john@hillalaw.com to schedule a free, initial consultation.

There is a quick and a not-so-quick answer

The not-so-quick answer pertains to Chapter 7 bankruptcies. A Chapter 7 bankruptcy is a complete liquidation of debt, not a reorganization as is a Chapter 13. Since all of a debtor’s debts are essentially erased through the Chapter 7 process, the creditors whose debts will be discharged by the bankruptcy are entitled to the proceeds of any of the debtor’s personal property that the court-appointed Trustee overseeing the Chapter 7 for the Bankruptcy Court is entitled to liquidate. That is to say, the extent to which creditors may have their debts satisfied is funded directly by the debtor’s personal property in a Chapter 7 and not by a monthly payment made from the debtor’s earned income as in a Chapter 13.

That being the case, the question for ANY property belonging to a debtor (jewelry or otherwise) is: “What property is the Trustee entitled to liquidate for those creditors?”

The Trustee may liquidate property that is, in short, not exempt from the “Bankruptcy Estate” that is created when the debtor files the bankruptcy petition. The Bankruptcy Estate is a legal estate much like a probate estate that is administered by a state court when someone passes away without a proper will having been written. In a probate matter, the state court determines the disposition of the deceased’s property. In a bankruptcy, the federal bankruptcy court, in the person of the trustee, determines the disposition on behalf of the creditors. Everything in the Bankruptcy Estate is able to be liquidated by the Trustee, and all of the debtor’s personal property and other assets are automatically part of the Estate—unless they are specifically, item by item, exempted from the Estate through the use of various exemptions that are provided in the Bankruptcy Code.

One of the more specific exemptions available in the Code is the exemption for a person’s jewelry.

The Federal exemption for jewelry is currently $1350.00. Jewelry that is higher in value than that amount may, in some cases, be covered by the “wildcard” exemption that is available to some debtors not utilizing their full homestead exemption. Otherwise, it may not be fully exempt and may be subject to liquidation by the Trustee.

The exemption for jewelry in Michigan, where I practice, is lower still: the Michigan exemptions (which be used instead of the Federal exemptions) provide for an exemption of just $3000.00 for ALL household goods, utensils, books, appliances, and jewelry—with the further provision that no one item be worth more than $450.00.

Therefore, the answer to the question of whether or not you may keep your jewelry in bankruptcy is, in a Chapter 7 bankruptcy, maybe. It depends upon the value of your jewelry and the availability of the “wildcard” exemption after the home you live in and all of your other personal property is taken into account and also whether or not you are using the Federal or state exemptions for your area. Further, when it comes to engagement rings and jewelry of particular sentimental value, the Trustees in your region may be lenient about liquidating the property even if not exempt, but this varies wildly by region and is best not to be counted upon.

If you are a southeast Michigan resident and are considering filing for bankruptcy, please contact me at (866) 674-2317 or john@hillalaw.com to schedule a free, initial consultation.