Will Filing Chapter 7 Bankruptcy Wipe Out My Retirement Savings?

Most retirement savings accounts are considered either exempt or not part of the bankruptcy estate and, therefore, are protected from turn-over during Chapter 7 bankruptcy.  When an account is considered “not property of the bankruptcy estate” it cannot be taken by the bankruptcy trustee for distribution to creditors. 

The U.S. Supreme Court has held that an employee’s interest in an employer pension plan (that qualifies under ERISA) is not property of the bankruptcy estate.  The Bankruptcy Code also protects certain retirement funds during a Chapter 7 bankruptcy case.  Retirement accounts classified under sections 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code are exempt from collection (up to certain amounts).   These sections cover most retirement plans and include pension plans, profit sharing plans, stock bonus plans, employee annuities, IRAs, Roth IRAs, government deferred compensation plans, plans of tax exempt organizations, and certain trusts.  The laws generally exempt these accounts up to a million dollars for each debtor. 

Other retirement accounts not otherwise exempt are protected if they are necessary for the support of the debtor and the debtor’s dependents.  Finally, bankruptcy laws protect certain retirement accounts like 457 deferred compensation plans, 403(b) tax deferred annuities, and health insurance plans regulated by state law. 

However, every case is different.  This year one bankruptcy court in Texas found that an IRA that was inherited by a debtor in bankruptcy did not receive the same retirement account protection under the bankruptcy laws.  In that case the court found that the IRA would only receive retirement account protection in bankruptcy if the debtor was the account holder and not merely a beneficiary. 

If you are experiencing debts you cannot pay, speak to an experienced bankruptcy attorney before taking any withdrawals from your retirement account.  In many cases your debts can be discharged during bankruptcy and your retirement account fully protected from creditors.

Inheritance and Bankruptcy

When a bankruptcy debtor inherits money from someone who dies within 180 days of the date the debtor filed bankruptcy that money becomes part of the debtor’s bankruptcy estate.  The inherited money that becomes part of the bankruptcy estate is used to pay your creditors.  This is true even if you have received a discharge and your Chapter 7 bankruptcy case has closed.  

For instance, if you file a Chapter 7 bankruptcy on April 1, and your great aunt dies on September 28 (within 180 days of the bankruptcy filing date), any money you receive from your great aunt’s estate must be turned over to the bankruptcy trustee.  It does not matter when you receive the money or when your case was discharged.  You might receive the inheritance years later, and it must be turned over to the bankruptcy trustee for payment to creditors.  You may be charged with bankruptcy fraud (a federal crime) if you fail to inform the trustee of your inheritance or turn over the money. 

If the trustee receives inherited money, your case will be reopened and a bankruptcy estate is formed.  Notices to creditors are sent and the trustee will distribute the funds to creditors.  In some cases you will be able to keep some of the money, and in other cases some of the funds may be returned.  

Inherited property is treated the same as cash.  If you receive a car or a family heirloom, the property must be turned over to the trustee.  In some cases you may be able to exempt inherited property or the trustee may consider the value of the inheritance too small or burdensome to liquidate and distribute. 

If you are considering bankruptcy and are aware of a significant chance of someone leaving you inheritance money, speak with your attorney.  There are options to avoid turnover including rewriting the will to cut you out, or setting up a spendthrift trust.  A spendthrift trust cannot be reached by creditors.  Consult with an attorney to properly create a spendthrift trust or rewrite a will.  There is nothing illegal or immoral about estate planning and your loved one may prefer leaving money to you rather than your creditors.

Bankruptcy Fraud is a Federal Crime

Bankruptcy fraud is a federal felony that carries a sentence of up to five years in prison and/or a fine of up to $250,000. Some examples of bankruptcy fraud include concealing assets, intentionally filing false or incomplete forms, and providing false information while under oath. Often bankruptcy fraud is accompanied by other serious offenses like identity theft, mortgage fraud, tax fraud, or money laundering.

Bankruptcy fraud can become very complex and may involve the IRS or FBI. The penalty may involve many years of incarceration when coupled with other criminal charges. Other cases are relatively simple like a recent case in Pennsylvania:

A husband and wife were each sentenced to fifteen days in prison by U.S. Magistrate Judge J. Andrew Smyser in the Middle District of Pennsylvania after finding contempt of court for untruthful conduct in their joint bankruptcy case.

According to a press release issued by the U.S. Attorney’s Office, Tammy Beecher and Wyatt Beecher filed a chapter 7 bankruptcy petition in May 2007. The filing stated that the Tammy Beecher had no income and that neither debtor operated a business within the previous six years. In fact, the Beechers owned a family business, “Fun 4 Kids Entertainment.” Only after the Beecher’s were presented with a coupon for $5 off any party, and reminded by the chapter 7 trustee that they signed the bankruptcy petition under penalty of perjury, did the Beecher’s admit that they owned and operated the business.

Bankruptcy fraud can be reported by ex-spouses, banks, and even your neighbors. The Executive Office of the United States Trustees (EOUST) recently launched an internet site that will allow the public to report suspected instances of bankruptcy fraud to the EOUST at http://www.usdoj.gov/ust/eo/fraud/index.htm.

The moral here is: tell your bankruptcv attorney everything. Your attorney can work with you to protect your assets and avoid criminal charges, but only if you tell all. The information you share with your attorney is shielded by attorney-client privilege, a powerful and time-honored protection. While your attorney cannot counsel or assist you in an illegal act, there are many legal options available in every case. If you are in over your head, speak with an attorney and understand your legal options.

Unemployment and the Bankruptcy Means Test

The U.S. Department of Labor reports that since December of 2007 the economy has shed more than eight million payroll jobs. The number of unemployed workers has surged from 7.5 million to 15.7 million, and 36 percent have been out of work longer than six months. Many struggling families are unable to meet their monthly financial obligations and are filing for bankruptcy protection. The American Bankruptcy Institute reports that 135,914 consumers filed for bankruptcy in October, and total bankruptcies are projected to exceed 1.4 million in 2009, the highest figure in four years.

 The recession has forced bankruptcy courts to examine the effect of unemployment on bankruptcy cases. The most challenging issue is whether an unemployed debtor can qualify for a Chapter 7 case, or if the debtor must file a Chapter 13 repayment plan case. The touchstone for determining this answer is the bankruptcy Means Test, which makes certain presumptions about the debtor’s finances and projects the debtor’s ability to pay debts based upon a historical six month average. Failing the Means Test means that the debtor is presumed to be able to repay some of the debts during a Chapter 13 bankruptcy. 

Calculating the six month average income can be tricky when dealing with a recently unemployed individual. First, income has usually sharply decreased and the actual present monthly income is considerably less than the six month average calculated by the Means Test. Fortunately, most bankruptcy trustees and judges are compassionate when a debtor has lost a job, and this presumption of repayment may be rebutted by evidence by the debtor of the involuntary reduction of income, actual current income, employment status, etc.

 Second, the Means Test income calculation includes any bonus or severance pay received during the six month period prior to the bankruptcy filing. This additional money may result in an inflated and inaccurate income calculation. Again, the presumption of an ability to repay can be rebutted, but the trustee and the bankruptcy court will require detailed financial records regarding how this money was spent. 

Third, unemployed debtors often receive unemployment compensation pay. How unemployment benefits are applied in calculating current monthly income under the Means Test differs from one jurisdiction to another. The issue turns on whether the unemployment compensation is a benefit received under the Social Security Act and is therefore excluded from a debtor’s income calculation. Some courts have held that unemployment compensation is a benefit received under the Social Security Act and are excluded from the debtor’s current monthly income. See In re Munger, 370 B.R. 21 (Bankr.D.Mass. 2007): In re Sorrell, 359 B.R. 167 (Bankr.S.D.Ohio 2007). Other courts find unemployment benefits are not excluded. See In re Kucharz, No. 09-81258 (Bankr. C.D. Ill. 10/28/2009); In re Baden, 396 B.R. 617 (Bankr.M.D.Pa. 2008). 

If your family has experienced an involuntary job loss and are struggling to make ends meet, consider your options. An experienced bankruptcy attorney can explain how the bankruptcy laws may help you restructure your finances and live within your means.

What If I Can’t Make My Chapter 13 Plan Payments?

During a Chapter 13 bankruptcy the debtor develops a plan to repay all or part of his debts through installments.  Once the bankruptcy court confirms the plan, the debtor is obligated to make payments over three to five years.  A lot can happen during those years, and sometimes a debtor is unable to pay the plan installment payments.  Fortunately the bankruptcy laws provide the Chapter 13 debtor considerable flexibility when facing changed financial circumstances. 

If your inability to pay the plan installments is due to a temporary interruption in pay (lay off, change in employment, etc.) or an unexpected financial emergency (car repairs, medical expenses, etc.), you may be able to obtain a suspension of payments for a couple of months.  A suspension only delays your plan payments, so your plan will be extended to make these payments up in the future.  Since a Chapter 13 plan cannot extend past 60 months, suspending plan payments may only work for certain below-median income cases that are not initially scheduled as 60 month plans. 

Modifying your Chapter 13 plan is another option, especially if your financial change is not temporary and you will continue to have difficulty paying your plan installments.  When you propose to modify the terms of your Chapter 13 plan, the bankruptcy court will scrutinize your financial records to determine what you can pay and whether creditors will receive more if your case was converted to Chapter 7 (a liquidation bankruptcy). 

Since a Chapter 13 bankruptcy is a voluntary case, you can always dismiss your bankruptcy case.  If your case is dismissed prior to discharge, you will typically not be barred from re-filing and receiving a discharge in the future.  However, there are certain exceptions that may apply, and dismissal is usually a last option.  Consult with your bankruptcy attorney. 

If your change of circumstances prevents you from affording any payment to creditors, you may opt for voluntary conversion to Chapter 7.  One benefit of conversion is that any debt incurred since your Chapter 13 filing date can be included in the Chapter 7 case.  

A hardship discharge is an option if your change in circumstances was beyond your control (job loss, illness, disability, etc.) and a Chapter 13 modification is not a solution.  A hardship discharge will end the Chapter 13 case prematurely and eliminate the remaining scheduled payments.  Hardship discharges are only granted for the most extreme cases. 

If you find yourself unable to pay your Chapter 13 plan installments, speak with your bankruptcy attorney immediately.  While there are options for dealing with a financial change, delaying action will only make matters worse.  Speak with your attorney and be proactive in dealing with your finances.

Your Bankruptcy Meeting of Creditors

The Bankruptcy Code requires every debtor to appear and submit to a bankruptcy examination under oath at a meeting with the debtor’s creditors.  This meeting is presided over by the bankruptcy trustee and is an opportunity for creditors and the trustee to determine if assets have improperly been disposed of or concealed or if there are grounds for objection to discharge.  At this meeting the trustee must inform the Chapter 7 debtor of the consequences of bankruptcy, the availability of relief under other chapters of the Bankruptcy Code, and the effect of receiving a discharge of debts and of reaffirming a debt. 

The Meeting of Creditors (also called the “Trustee’s Meeting,” the “Creditors’ Meeting,” or the 341 Meeting (after section 341 of the bankruptcy code which requires the meeting) is held between 20 and 40 days after your bankruptcy is filed.  The bankruptcy court schedules the meeting and mails notices to all of your creditors.  However, the bankruptcy judge is prohibited from attending the meeting.  Since there is no judge, the Meeting of Creditors is not a judicial proceeding.  

The bankruptcy trustee is required examine you under oath and investigate your financial affairs.  The trustee then submits a report to the bankruptcy court and Office of the U.S. Trustee.  The trustee is also required to ask specific questions, including: 

Did you read your schedules before signing them?

Did you list all of your assets?

Did you list all of your debts?

Are your schedules accurate or do you need to make any corrections?

Do you have a domestic support obligation? 

The trustee may also have specific questions concerning your schedules which may involve your assets, income, expenses, debts, or financial transactions.  Your attorney will be present with you to assist you during this examination.  The trustee may also require that you provide information or documents before, during or after the meeting including bank statements, pay stubs, tax returns, vehicle titles, and land ownership and debt documents.  Finally, you are required to provide proof of identity including social security number and a government issued photo I.D. 

Despite the name, the Meeting of Creditors is generally a meeting that no creditors attend.  For most national creditors like Ford Motor Credit or Capital One it is not cost-effective to attend these meetings.  Because the trustee conducts dozens of these meetings on the same day, any creditor questions are limited to only a few minutes.  If the creditor needs additional time, it can ask the bankruptcy court to order the debtor to appear for a further examination between just the creditor and the debtor at a later date. 

Many bankruptcy debtors are very nervous going into the Meeting of Creditors, but soon realize that it is just a procedural formality.  Your bankruptcy attorney will assist you during your meeting, and can answer any questions concerning the Meeting of Creditors or the bankruptcy process.

Creditors You Intend To Pay

Almost all debtors in bankruptcy are honest people who have experienced great financial difficulty.  One of the most common questions asked by debtors is, “Do I need to list a creditor I intend to repay?” 

The answer to this question is very simple: “Yes!”  You must list all of your debts and each of your creditors, even those you intend to repay.  There are two ways to repay a debt after bankruptcy.  The first is by voluntary payment.  The second is with a reaffirmation agreement. 

Voluntary payments made after your bankruptcy discharge neither create a new legal obligation nor invalidate the discharge order.  Any payment you make on a discharged debt is the result of a moral obligation since the legal obligation to pay the debt has been discharged by the bankruptcy court.  The creditor is still prohibited from contacting you or trying to collect on the debt. 

A reaffirmation agreement is a new contract between you and your creditor.  It is fully enforceable after the bankruptcy, so if you default on the obligation the creditor can sue you and repossess any property securing the agreement.  Reaffirmation agreements are commonly used to continue auto and home loans.  The debtor agrees to continue the legal obligation to pay the loan, and the lender agrees to not repossess the collateral.  

Reaffirmation agreements are only available to Chapter 7 debtors and the agreement must be executed before the bankruptcy discharge is entered.  The debtor can revoke the agreement with 60 days after the agreement is signed.  The Bankruptcy Code requires that the debtor demonstrate that the paying a reaffirmed debt will not create an undue hardship for the debtor or the debtor’s family.  While a reaffirmation agreement can be used for credit card agreements and other unsecured loans, bankruptcy courts are reluctant to approve these agreements without exceptional circumstances. 

You are free to continue to pay a debt after your bankruptcy.  Congress specified in the Bankruptcy Code that “Nothing contained in. . . this section prevents a debtor from voluntarily repaying any debt.”  There are several legal options for repaying a debt after bankruptcy, as well as several avenues for debt restructuring.  Discuss your specific situation with your bankruptcy attorney and discover your options.

Can One Spouse File Bankruptcy Alone?

While it is common for a husband and wife to file a joint bankruptcy, in some cases it may be beneficial for only one spouse to file.  When one spouse files for bankruptcy protection, the other spouse is not automatically joined into the case.  The husband and wife are treated separately and individually, although there are some consequences to the non-filing spouse, both positive and negative. 

Filing separately can have several advantages to a husband and wife who have separate property and debts.  It is especially appropriate when there is a large debt that only one spouse is liable to pay, and the parties are able to either protect their marital property through exemptions or by virtue of the non-filing spouse holding the property as non-joint property.  Property in which the debtor has no ownership interest is generally not property of the debtor’s bankruptcy estate and beyond the reach of the bankruptcy court. 

While the bankruptcy automatic stay will stop collection action against the debtor, this protection does not apply to protect a non-debtor.  In a Chapter 7 case, a creditor may still collect on a joint debt from the non-filing spouse.  In a Chapter 13 case, the bankruptcy code imposes a co-debtor stay that generally prohibits collection on joint debts during the bankruptcy.

Likewise, the discharge order at the end of the case will only apply to bankruptcy debtor.  The discharge does not prevent collection on any joint debt from the non-filing spouse.  Most joint debts are the result of a contract or the agreement of the husband and wife to pay a debt, however in some limited cases a statute or other circumstances may make both parties liable for a debt.  If you have any questions concerning whether you or your spouse is liable for a debt, consult with your attorney. 

Property may be protected through state or federal law exemptions, or the property may be excluded from the bankruptcy estate when the bankruptcy debtor has no ownership interest.  Property that is held jointly and cannot be protected by exemption laws may be at risk for turn-over to pay creditors in a Chapter 7 case. 

The decision to file bankruptcy for one or both spouses can require a complex analysis of the separate and joint property and debts of each spouse.  Every case is different and while some cases gain a benefit from filing jointly, other cases receive a greater benefit from a separate bankruptcy.  If you are in a situation where a separate bankruptcy filing may benefit your family, consult with an experienced bankruptcy attorney and discuss your options.  The federal bankruptcy laws offer many choices for individuals needing debt relief and your attorney can help you decide the best financial decision for your family.