New Federal Protection for Exempt Bank Funds
A new federal rule that was effective on May 1, 2011, will increase protection for exempt funds in a garnished bank account. Federal law already protects many federal benefits, but it is currently the responsibility of the individual to claim these funds as exempt. Often the bank will freeze a bank account pursuant to an order and the individual must request a court hearing to release the funds.
Under this new Treasury Department rule, an electronic tag will be added to automatic deposits from government agencies. These funds include Social Security, Supplemental Security Income (“SSI”), Veteran’s Administration (“VA”) benefits, federal Railroad Retirement, federal Railroad Unemployment and Sickness benefits, federal Civil Service Retirement benefits and federal Employee Retirement System benefits. Banks are required to exempt all tagged deposits made during the previous two months and protect those deposits from garnishment. The consumer is no longer required to take any action to claim or identify exempt funds. The rule makes banks not liable to creditors for refusing to garnish the tagged funds, even if the money is co-mingled with other non-exempt money.
The National Consumer Law Center estimates that more than 1 million people each year have accounts garnished that contain exempt federal funds. Recipients are often sick or elderly and may be forced to forego needed food and medicine when an account is frozen.
This new rule applies to all federally chartered federal and state banks and credit unions. While there is no cap on the amount of protected funds, the automatic protection only applies to the previous two months. Exempt funds must be deposited electronically to receive the identifying tag. Deposits made by paper checks are still exempt, but the bank is under no obligation to identify these funds or protect them from garnishment. The rule does not apply to military retirement or state issued benefits.
There are many powerful consumer protection laws. If you have a judgment against you and are at risk of a bank or wage garnishment, consult with an experienced bankruptcy attorney and discover how the law can help. Your attorney can discuss your legal options to make the best of a bad situation.
Protecting Your Income Tax Refund
The traditional wisdom regarding bankruptcy and tax refunds is: get it and get rid of it before filing bankruptcy. The bankruptcy trustee can’t take what you don’t have, right?
In the law there are rarely absolutes. In some cases the trustee can demand money that you no longer have in your possession. A common example of this is a preference payment to an insider creditor (e.g. repaying a loan to your mother from your tax refund). The trustee can sue you or your creditor for the turnover of the money.
The simplest way to avoid any potential loss of your income tax refund is to discuss the situation with your bankruptcy attorney. In many cases your attorney can exempt all or a portion of your tax refund, so you can keep the cash money after you file bankruptcy. First, you are required to identify the property in your bankruptcy schedules, and then apply the applicable exemption law to protect it. Failure to list or exempt this asset may render the entire amount unprotected and lost to the bankruptcy trustee.
If your exemptions will not protect all of your income tax refund, you should consider spending the difference to benefit your family. The best guidance is to spend the money on goods or services that are reasonable and necessary. While your attorney can help you decide on specific purchases, the following categories are generally safe:
1. Household expenses such as utility bills, mortgage or rent payments, car payment, auto insurance, and needed auto repairs/tires
2. Personal expenses such as food and clothing, dental work, and medicine
3. Priority debts like child support arrears and tax debts
Luxury good purchases like electronics, vacations, and jewelry should be avoided. Likewise gifts to family members or friends, spending sprees, and gambling should all be avoided. Any payment from your tax refund that you plan to make to a creditor should be discussed with your attorney.
Your income tax refund is your money! You can ensure that this money benefits your family by discussing your situation with your bankruptcy attorney.
Be Accurate About Your Bank Balance When Filing Bankruptcy
During a Chapter 7 bankruptcy case, all of the property in the debtor’s “possession, custody, or control” is part of the bankruptcy estate. If there is estate property that is not exempt from collection, the bankruptcy trustee may require turn-over the property to pay creditors. It is therefore extremely important to accurately identify all of the debtor’s property and its status prior to filing a bankruptcy case.
One situation that can cause headaches in bankruptcy is misrepresenting the actual balance in a checking account on the day the bankruptcy is filed. If the debtor is unable to exempt the cash balance in a bank account, the trustee may require its turn-over, even if the cash is subsequently spent.
Delays in filing a case can sometimes lead to checking account issues. For instance, the debtor believes that the case was filed the day before payday, when actually it was filed on the debtor’s payday. The bankruptcy schedules report $100 in the bank account, when actually the amount is $1,000.
Negligence can also be a factor in bank account mishaps. One common mistake is reporting the checking ledger balance instead of the actual bank balance. The United States Supreme Court held in the case of Barnhill v. Johnson, 503 U.S. 393 (1992), that the transfer of funds occurs when the bank honors a check. Therefore, if the bank balance is $2,000 and $1,900 is written in outstanding checks that have not been honored by the bank, the full $2,000 is property of the estate.
Preventing the above problems is simply a combination of good bookkeeping and good communication. First obtain your actual bank balance, and account for any direct deposits, pay checks, and any outstanding checks. Next discuss the situation with your bankruptcy attorney. Be careful about writing checks just prior to filing bankruptcy. In some cases pre-filing financial transfers can cause additional issues in your bankruptcy. It may be prudent to delay your bankruptcy filing until certain checks clear or your paycheck has been spent on necessities.
Avoiding surprises and problems in your bankruptcy case takes cooperation between you and your attorney. Immediately inform your attorney if you have changes in your property, debts, income, or expenses after you have signed your bankruptcy petition.
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.
Can I Have Money in a Bank Account When I File Bankruptcy?
The two most common types of consumer bankruptcies are Chapter 7 and Chapter 13. In a Chapter 7 all of the debtor’s property is placed into an estate which is controlled by the bankruptcy trustee. While no property physically changes hands (at least not at the beginning of the case), the trustee and bankruptcy court have broad legal power over your property. If you have money in a bank account on the day you file, your bank account and money are assets of the bankruptcy estate. You are no longer free to transfer funds or assets as they now belong to the bankruptcy estate.
Take for example that you have $5,000 sitting in your checking account on the day you file bankruptcy. That money is property of the Chapter 7 bankruptcy estate and is no longer yours to control or use. If you take the $5,000 out of the bank the day after filing to pay your mortgage payment and other bills, the Chapter 7 trustee can seek to recover those funds, either from you or from the payee.
During a Chapter 13 bankruptcy the debtor retains possession and control over his or her property, and is free to use any funds in the debtor’s bank account. An accounting is performed and the debtor’s property is classified as either exempt or non-exempt. Non-exempt property is not taken from the debtor (as is often the case in a Chapter 7), but the Chapter 13 debtor is required to pay unsecured creditors a sum equal to the amount of non-exempt equity. For instance, if there is $5,000 in the debtor’s bank account, the debtor may only be able to exempt a portion of the entire sum. The non-exempt portion must be paid to the creditors through the debtor’s Chapter 13 plan (over three to five years).
Cash in a bank account can be a problematic issue for a debtor. Avoiding these problems is the joint responsibility of the debtor and the debtor’s bankruptcy attorney. Timing is critical to minimizing your financial exposure. An experienced bankruptcy attorney can help you maximize the benefits of the bankruptcy laws and navigate around any pitfalls.