Articles Posted in Non-Exempt Assets

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With the effects of Coronavirus still impacting the economy, many people are facing loss of income. This reduction in  income makes it harder for working people to pay their bills.  Things might not get better. One economist estimates 42 percent of recent layoffs will result in permanent job loss.

Whether their  lay offs are permanent or temporary,  people are looking for ways to save money on goods and services that they need. With the advent of the Internet, people have become used to finding information and deals on items they need. The Internet Age has made  people used to getting things fast and cheap, or even free. It has also made people believe in do-it-yourself. Just watch a video and you can do anything yourself.  The recent lockdowns have had people searching for Youtube videos on how to cut their own hair, since most salons and barber shops have been closed.

Some people who are facing overwhelming debt also look for do-it-yourself solutions to deal with their debt. They often file for bankruptcy without an attorney. There are signs in Jacksonville along I-95 exits saying “Bankruptcy $150.” These signs are placed along the interstate by non-lawyers or “petition preparers” who will take $150 from you to type the documents necessary to file a bankruptcy case. The thought is that bankruptcy is just filing out some forms and filing them with a court.  (This author once had a boss, who is a lawyer. This lawyer  declared, “Bankruptcy isn’t rocket science; it is just filling out a bunch of forms about your finances.”  When this person filed for bankruptcy a few years later, she hired a competent lawyer.)

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With tax season upon us, many Americans are looking forward to getting big tax refunds. Many of us use these refunds to  replace aging appliances, catch up on car payments or put into a vacation fund for when warmer weather finally comes back.   However, many people are also worried about how to deal with debt that they racked up during the holiday season. In order to get relief from this debt, and with holiday ornaments finally put away, many consumers contemplate filing bankruptcy after the New Year begins.  Filing bankruptcy gives consumers a fresh start in their financial life. However, there is a trade-off involved: while filing bankruptcy will wipe out most of your debt, you might have to give up or buy back property that is not “exempt.” Filing for bankruptcy could require you to pay for an asset (usually a car) for which you already paid.

The filing of a bankruptcy case creates an estate similar an estate that is created after someone dies. This estate is made up of one’s assets that are not exempt under the law. The United States government appoints a trustee in a Chapter 7 bankruptcy case to liquidate (or sell) any non-exempt assets and use the proceeds to pay unsecured creditors like credit cards. In order to be able to protect property and keep the trustee from taking from you when you file bankruptcy, the Debtor must claim the property is exempt under Florida or federal law. (Florida has “opted-out” of federal Bankruptcy exemptions, so Debtors may only use exemptions under Florida law or non-bankruptcy federal laws.)

The only part of tax refunds that is specifically exempt under Florida law is the part of the refund from the Earned Income Tax Credit. (Although Judge Jennemann in Orlando recently held that Child Tax Credit is exempt in Chapter 7 cases.)  The rest of your tax refund falls under the personal property exemptions under Florida law, which are among the stingiest in the nation. There are no specific exemptions under  Florida law to project the Child Tax Credit; the American Opportunity Tax Credit (which helps families pay for postsecondary exaction); the Lifetime Learning Credit (which helps people who go to college later in life or have to change jobs due to down-sizing or loss of jobs because of technology or free trade agreements); or the Child and Dependent Care Credit (which helps pay daycare costs for working parents). Many of these tax refunds are refundable and therefore give taxpayers a much larger refund than they otherwise would have received. If these refunds cannot be exempt under the law, you could lose them to the Chapter 7 trustee and not be able to spend them  the way in which you intended.

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Assets-3-150x150What is an ESOP?

Employee Stock Ownership Plan, better known as an “ESOP,” is a way for employees to have ownership in the company they work for. They are used by several large successful companies because of the various tax benefits they can offer to the company as well as to the employee. Most commonly, employees obtain ownership of the company’s stocks as an award to help motivate and reward the employee. They are also a great way for employees to plan for retirement.

Because of how an ESOP works as a trust fund, employees generally do not have much control or access to their shares until they reach retirement age, or when their shares vest. Because of this lack of access, most ESOPs are treated just like a 401K, or any other retirement plan that is qualified under ERISA, when they file bankruptcy; therefore, ESOPs are treated as an exempt asset.

How does an ESOP work?

Just like a trust fund or spendthrift trust, all shares are retained in an ESOP trust until retirement age or termination of employment. Basically, when a company decides to set up an ESOP, they create a trust that the company makes yearly contributions to. The company then creates a formula that controls how employees receive stock in the company. Before an employee can have access to their stocks, their stocks must first vest. Continue reading →

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Filing bankruptcy is a very scary process with a lot of unknowns. Throw in owning a small business, and it can be extremely overwhelming. The three most common types of small businesses are sole proprietorships, corporations and limited liability companies. The main characteristic of a sole proprietorship is that there is not a legal distinction between the owner and the business. What this means when filing a personal bankruptcy is that if the sole proprietorship has any assets, those assets will be considered the owner’s when filing bankruptcy.

If your small business is a corporation or a limited liability company, then the business is a completely different entity that is separate and apart from the owner(s). Outside of bankruptcy, this means that the debts of the owner are not the debts of the business, and the debts of the business are not the debts of the owner. This also means that any assets the business has only belongs to the business and not to the owner(s).

However, inside of bankruptcy things are little different. When you file a personal bankruptcy and are the owner of a corporation or limited liability company, the debts of the business are still not the debts of the owner and vice versa. What is different is that the assets of the business will be considered the assets of the owner for bankruptcy purposes. Whether the business assets are safe will depend on whether you file a Chapter 7 or a Chapter 13 Bankruptcy and whether the business has any assets. If the business does not have any assets, then the business should not be affected by the owner filing a personal bankruptcy, regardless of which bankruptcy chapter is being filed. Things can get a lot more difficult if your business has assets. Continue reading →

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Protect_thumbSection 529 of the Internal Revenue Code allows parents to set up education savings accounts for their child’s future college expenses. In Florida, these educational savings accounts are most commonly known as Florida’s Prepaid College Fund or Florida’s 529 Savings Plan. These types of plans can only be established for a child, stepchild, grandchild or step-grandchild and set up in the name of the person establishing the account (for example the parent or grandparent of the child) and the funds belong to that person.

When filing bankruptcy, this means the person who established the prepaid college fund for must disclose the fund in their bankruptcy petition as an asset. I am sure you are now wondering whether or not you will loose the prepaid college fund if you have to file bankruptcy, since it must be disclosed. The answer is, it depends. There are Federal and Florida specific exemptions for these types of accounts. If the exemption applies, then the funds should be safe from your creditors and you will get to keep it if you find yourself in the dire position of having to file for bankruptcy.

In Florida, Florida Statute 222.2 defines Florida’s exemption of assets in qualified tuition programs as:
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Inheritance and bankruptcy are two topics that are not commonly thought of at the same time, nor is inheritance even thought of as a consideration when deciding to file bankruptcy. The issue being that if you file for bankruptcy and receive an inheritance within 6 months of filing, you could loose your entire inheritance to your bankruptcy estate. In other words, your bankruptcy trustee will take your inheritance from you and use it to pay off your debts. The majority of most people who file for bankruptcy have not taken into account the possibility of receiving an inheritance, and as a result, are naturally devastated when they learn they do not get to keep their inheritance as they expected. To put it simply, if you believe you may receive an inheritance within the next 6 months, you may need to wait to file for bankruptcy.

But what if you cannot wait to file bankruptcy due to an imminent foreclosure sale date or garnishment? Can anything be done to save your inheritance? An even less thought about concept is the planning your parents, or any other person who may leave you an inheritance, can do. By simply establishing the right kind of estate plan, your parents, or anyone else for that matter, can protect your inheritance from being taken by a bankruptcy trustee. By having any person who may leave you an inheritance include something known as a “spendthrift provision” in their will or other estate planning documents, your inheritance should be able to be protected if you find yourself in the difficult position of having to file for bankruptcy.

What is a “spendthrift provision” you may ask yourself? It is a provision found in a will or trust document that allows a personal representative or the trustee of a trust to first look to see if a beneficiary is in the middle of a bankruptcy or if they are about to file for bankruptcy before giving the beneficiary their inheritance. Simply put, the personal representative or trustee can first look both ways before crossing the street to make sure it is safe to give the inheritance to the designated beneficiary. If it is not safe, then the personal representative or trustee can take the appropriate steps to ensure the inheritance will not be lost.

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One of the major concerns that most people have when they begin to consider whether or not they should file a Chapter 13 Bankruptcy is what will happen to their property. Will it be taken from them or will they be able to keep it? But what most do not consider is the property that they may acquire after they have already filed their bankruptcy. It can easily be assumed that all property you own at the time you file your Chapter 13 Bankruptcy will be part of your bankruptcy estate. But what if you inherit property or are the victim in a car accident in which you have the right to file a lawsuit after filing?

First and foremost, there is a duty in a Chapter 13 to update your schedules when you acquire new assets until your Chapter 13 Plan is completed. This rule applies to property you acquire pre-confirmation as well as property acquired post-confirmation. Luckily, not every little piece of property you acquire post-confirmation requires you to update your schedules. It is suggested that only major ones require disclosure.

As a general rule, the following post-petition acquired types of property will always be considered to be a part of your bankruptcy estate and require disclosure to your Chapter 13 Trustee:

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If you are thinking about filing bankruptcy and you have any kind of intellectual property (i.e. a patent, copyright, trademark, or trade secret), it is very important to understand the affects filing bankruptcy may or may not have on your intellectual property.

Section 365(n) of the United States Bankruptcy Code provides specific protections for licenses, but does not provide any protection for trademarks. All other types of intellectual property (patents, copyrights and trade secrets) are generally determined to be an executory contract and are treated as such in bankruptcy.

If it is the licensor who is filing bankruptcy, then they have the right to either assume or reject the license. If they choose to assume the license, then they must meet the very specific requirements for assuming an executory contract in bankruptcy. In order to assume an executory contract while in bankruptcy, the debtor licensor must cure all outstanding defaults and make sufficient assurances for continued performance moving forward. If both of these criteria are met, the licensee generally will not take issue with the assumption as long as the debtor licensor actually performs. If the licensor chooses to reject the license, safe guards have been put in place to prevent the licensee from losing their rights to use the intellectual property. Specifically, the licensee has the ability to choose to keep its rights to the intellectual property, but must make any mandatory royalty payments.

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Many people who are considering filing bankruptcy are very concerned about their property jointly owned with a spouse, sibling, or other person. These are real concerns as a bankruptcy filing could cause a joint-owner to lose his or her interest in the property. The exact affect a bankruptcy filing may have depends on who the joint-owner is, how the property is titled, and your state’s exemptions.

The most commonly held joint-property is property held by a husband and wife. In Florida, property owned by a husband and wife is presumed to be by Tenancy by the Entirety unless specifically specified otherwise. This type of joint ownership protects the property from the bankruptcy estate if only one spouse is filing bankruptcy and there are not any unsecured joint debts. Property held by a husband and wife as joint tenants with the right of survivorship is not afforded this type of protection.

The second most commonly held property is property inherited by siblings from a passing parent or other family member. Unless the property can be protected by a bankruptcy exemption, your siblings or other family member could lose their title to the property due to a bankruptcy filing. Unfortunately, the bankruptcy court does not care how you acquired the property. It could be through a gift, inheritance, purchase, etc., but once you have acquired the property, you have acquired it, and it is part of your bankruptcy estate. This means that if it is not protected by an exemption, the trustee could ask the court to order the sale of the property in order to settle your debts. This causes your joint owners to lose their title to the property. This is true for property held as joint tenants, joint tenants with the right of survivorship, and tenants in common.

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During bankruptcy, most of a debtor’s property becomes part of the bankruptcy estate. Debtors who file a Chapter 13 bankruptcy are required to repay their creditors through a three to five year repayment plan. If a debtor receives an inheritance during their repayment plan, he or she may be required to amend their plan to account for the inheritance.

In a Chapter 13 bankruptcy, the debtor gets to keep his or her property, but must pay back a certain amount of their debt through a repayment plan. A debtor will usually make monthly payments to the bankruptcy trustee who distributes the money to the debtor’s secured and unsecured creditors. After this three to five year period, the court will discharge the debts.

Any property a debtor acquires during their Chapter 13 bankruptcy most likely will become property of the bankruptcy estate as well. This means an inheritance received during this period can become part of the estate.

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