A recent article in the California Law Review Online declared that, “The coronavirus pandemic is set to metastasize into a debt collection pandemic. This is because while evictions, foreclosures and student loan payments have been stayed by various government  orders and federal regulations, there is no blanket moratorium or order stopping debt collection lawsuits. Many debt collection law firms have ramped up credit card collections lawsuits since they have not been able to bring or finish foreclosure lawsuits. Many credit card collection lawsuits end up with the consumer getting a default judgment entered against them, since they believe there is nothing that they can do to stop these lawsuits. Debt collection law firms nationwide kept filing new cases during the shutdown, consumers be damned. For example, in Maryland, two major debt collectors alone filed over 2,000 suits in April.  These law firms must keep their gravy train rolling, even if many Americans have lost their jobs or part of their income, through no fault of their own.

After a homeowner gets a judgment against him or her, the law firm will usually attempt to get paid–voluntarily at first, and then by using court process to take the homeowner’s income and assets. There are several ways in Florida that a judgment creditor can collect on a judgment.

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.)

The reason for these payments is that the federal government wants to try to “stimulate” the economy, which COVID-1, or the coronavirus, has wrecked.  Millions of Americans have lost their jobs or seen their pay reduced since March. It has been estimated that nearly 1 out of 5 Americans has lost a job or wages because of the virus.  When consumers don’t have money to spend, the ripple effect causes most businesses to struggle. People are not buying goods and services from brick and mortar businesses, which in turn have to lay off employees who can no longer buy goods and services from other merchants. Goldman analysts see the U.S. economy contracting 24% in second quarter, a rate nearly five times as large as bank’s previous forecast

While the government wants us to spend this money to keep the wheels of commerce rolling, some banks want to seize this money to recover money owed to them by their customers. When Congress passed the CARES Act authorizing these payments, it did not characterize the funds as federal benefits, but as tax credits. This means that private debt collectors may take the money once they are in a bank account.

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.

But what happens if the IRA was not originally yours? What if it was inherited? Is it still safe from your creditors in bankruptcy? The answer is yes and no. If you inherited your IRA from your spouse, then it will still have the same protections as if the IRA was originally yours. However, if you inherited the IRA from someone other than your spouse, then it will not qualify for the exemption. Thus, it will be considered part of your bankruptcy estate and subject to the claims of your creditors.

The Supreme Court handed down this ruling in Clark v. Rameker ,134 S. Ct. 2242 (2014). In this case, a daughter inherited an IRA from her mother in the amount of $450,000. After a business failure, the daughter was forced to file bankruptcy and claimed that her inherited IRA from her mother was exempt. The Supreme Court surprised many when it ruled that an inherited IRA from someone other than a spouse, is not protected by the exemption. However, there are seven states that have made their own Bankruptcy Rules that differ from the Supreme Court’s decision. The states of Florida, Ohio, North Carolina, Missouri, Texas, Arizona, and Alaska amended their state bankruptcy laws to overshadow the Supreme Court decisions.

Inherited IRAs Outside of Bankruptcy

What if you are not filing bankruptcy? Is your inherited IRA protected from your creditors? After the Supreme Court’s ruling, the answer is not very clear on the federal level. Therefore, you must look to your specific state’s laws regarding what types of assets are protected from creditors when you are not filing bankruptcy in your state. Some states already have very specific laws in place that protect inherited IRAs. In these states (Florida, Ohio, North Carolina, Missouri, Texas, Arizona, and Alaska), your inherited IRA is most likely protected.

Specifically under Florida Statute § 222.21(2), as long as an inherited IRA is “[m]aintained in accordance with a plan or governing instrument that has been determined by the Internal Revenue Service to be exempt from taxation under s. 401(a), s. 403(a), s. 403(b), s. 408, s. 408A, s. 409, s. 414, s. 457(b), or s. 501(a) of the Internal Revenue Code of 1986, as amended, unless it has been subsequently determined that the plan or governing instrument is not exempt from taxation in a proceeding that has become final and nonappealable,” it will be protected from your creditors.

Regardless, it is always a better practice to have beneficiaries of an IRA be that of a properly drafted trust to ensure the asset is safe to leave to the beneficiary. You never know where a beneficiary might be living. If they are outside of Florida, the IRA might not be safe.

Regardless, if you believe your inherited IRA will be protected if you file bankruptcy, you should always confirm with a bankruptcy attorney before filing. If you file a Chapter 7 Bankruptcy and then learn that your inherited 401K will not be protected, there will be very little that can be done at that point to protect the IRA. Contact the Law Office of David M Goldman, PLLC today.

401k Loans

Many who file bankruptcy may have also taken out a 401k loan in an effort to avoid having to file bankruptcy. It is important to understand how your 401k loan will be treated in your bankruptcy. First of all, a 401k loan is not considered a regular debt and will not be treated as any other creditor. In other words, a 401k is not dischargeable through bankruptcy and you will still have to repay it after your bankruptcy is completed. Additionally, in a Chapter 7 in which assets are available to be liquidated, your 401k loan would not receive any portion of the liquidated funds as a normal creditor would. In a Chapter 13, your 401k loan would not be part of your chapter 13 plan. However, you most likely will be allowed to still make payments towards the loan through automatic deductions on your paystubs.

Can you take out a 401(k) loan before filing bankruptcy?

Yes. You can take out a 401(k) loan before filing bankruptcy. However, there are several considerations you should first think about because you will be stuck repaying that loan after bankruptcy. You do not want to use a 401k loan to pay off any debts unless it is going to completely solve your debt issues. This is because, again, you will still have to repay the 401k loan after bankruptcy. Also, as long as the funds remain in your 401k, they will be protected. As soon as the funds are released from your 401k, they lose that protection. Finally, funds received from a 401k loan can be treated as income on your MEANS test. This could cause you to no longer qualify for a Chapter 7 because your income is too high.

Can you take out a 401k loan during or after bankruptcy?

Yes. But it is still never advised. If you are in a Chapter 13, you will have to get the court’s approval first.

Paying off your 401k loan before filing bankruptcy.

Since a 401k loan is not treated as a normal debt in bankruptcy, if you payoff the loan before filing bankruptcy, your Trustee could potentially undue the transfer and redistribute the funds used to payoff your 401k loan to your other creditors. But, this is very jurisdiction dependent. In some jurisdictions, there is rarely any objection over the repayment of a 401k loan.

Regardless of whether you have a 401k loan, it is always important to talk about your 401k and how it will be affected by bankruptcy with an experienced bankruptcy attorney. Please call the Law Office of David M. Goldman, PLLC today.

What 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.

My ESOP and bankruptcy.

As mentioned above, ESOPs are generally treated just like any other retirement plan in bankruptcy and are therefore an exempt asset, but your ESOP must first pass a two-step test.

First, you must figure out whether or not the ESOP is actually even a part of your bankruptcy estate. As long as there is an anti-alienation clause written in your ESOP documents that restricts your ability to access or transfer your stock, then it should be excluded from your bankruptcy estate. This anti-alienation clause also qualifies the ESOP under ERISA.

In Florida, courts have compared ESOPs to spendthrift trusts. One of the most important things about a spendthrift trust that makes it safe in bankruptcy is that they are set up by someone other than the beneficiary for the beneficiary’s benefit. Therefore, whether your ESOP is safe in bankruptcy really boils down to your access to the stock.

Florida courts have determined that ESOPs are safe where the debtor is unable to reach the stock after leaving employment until they reach retirement age and where they are unable to borrow money from the plan.

On the other hand, if a debtor’s interest in the stock vests and they can reach the stock upon termination or withdrawal proceeds prior to retirement age, then the debtor’s access or control over the stocks disqualifies the ESOP from the exemption and the ESOP will be subject to your bankruptcy estate.

Making sure that your ESOP is safe when you file bankruptcy is very important as they are most often an individual’s biggest asset. This is why it is so paramount to consult with an experienced bankruptcy attorney before filing bankruptcy. Contact the Law Office of David M. Goldman, PLLC.

Selling one of the vehicles would be considered a pre-bankruptcy transfer of property, and there are several factors that determine whether a person can complete a pre-bankruptcy transfer. Your bankruptcy trustee will look at whether the property in question would have been exempt when you filed your bankruptcy, the price you received for the property, how those proceeds were spent, and the reason for the transfer.

If the property would have been exempt when you filed bankruptcy, then transferring the property prior to filing bankruptcy should not be an issue. However, it could cause a delay in the bankruptcy process as your trustee makes this determination. Your trustee will want to make certain that you received the fair market value of the property and that it was in fact exempt. In Florida, a debtor is allowed $4,000 in personal property and $1,000 in a motor vehicle if they do not claim the homestead exemption. If a debtor claims the homestead exemption, then they are only allowed $1,000 in personal property and $1,000.00 in a motor vehicle.

BUT, if you are planning to file bankruptcy and the property would not be exempt in bankruptcy, then you need to proceed with much caution. It is best to first speak with an attorney before making any pre-bankruptcy transfers. Your trustee most definitely will investigate the transfer and will pay close attention to when the transfer was made and the proceeds received from the transfer. If the fair market value was not received, then the trustee may undo the transfer or make you pay the fair market value of the transfer to your bankruptcy estate. The trustee can also look into certain types of transfers from as far back as ten years ago. However, they most commonly only look back two to five years in Florida.

Another thing your trustee and the court will look into is your intent at the time of the transfer. Your intent can be inferred by looking at who you transferred the property to, did you try to conceal the transfer, what was your financial situation when the transfer occurred, etc.

If you use the proceeds from the transfer of non-exempt property to increase the value of your homestead, such as by paying down the mortgage or making improvements, the court can look back 1,215 days. Without having to look at your intent, the court can then reduce your homestead exemption by that amount. Luckily, however, using such proceeds to make normal mortgage payments or normal maintenance and repairs should not be an issue.

Despite the type of property you are looking to transfer prior to filing bankruptcy, it is best to consult with an experienced attorney. Speak with the Law Office of David M. Goldman, PLLC at 904-685-1200 for a free initial consultation.

Fraud in bankruptcy can take a couple of different forms.

1. When a debtor, the person who is filing for bankruptcy, tries to hide their assets in order to prevent losing them. When filing bankruptcy, you are provided certain exemptions that allow you to protect a portion of your assets. Any asset that is not protected by one of these exemptions can be taken from you by the trustee and then distributed to your creditors.
2. When a debtor tries to bribe the bankruptcy trustee.
3. When a debtor deliberately files falsified or incomplete bankruptcy forms in order to protect their assets from being seized by the trustee.
4. When a debtor files for bankruptcy multiple times this can be viewed as an abuse of the right to file bankruptcy and enjoyment of the protections that bankruptcy affords. As soon as someone files for bankruptcy, an automatic stay is put into place that prevents any of their creditors from continuing to collect the debt that is owed to them. This is often seen when someone is facing foreclosure. The debtor files for bankruptcy on the eve of a foreclosure sale date with no intention of completing the bankruptcy. The intentions are to have more time in the home. The bankruptcy is later dismissed by the court because the forms are incomplete or because the debtor does not comply with the bankruptcy court, or the debtor dismisses the case themselves. Once the bankruptcy case has been dismissed and a foreclosure sale date has been reset, the debtor again files bankruptcy on the eve of the sale date with the same intentions as the prior bankruptcy. Some debtors do this over and over again, and this is an abuse of the bankruptcy system.

It is important to note that while bankruptcy fraud not only involves one of the above-mentioned forms, but it is usually coupled with some criminal activity such as money laundering, mortgage fraud, or corruption.

The overwhelmingly most common type of bankruptcy fraud committed is when debtors try to hide some of their assets from the bankruptcy court. And this is exactly what Abby Lee Miller has pleaded guilty of doing. Apparently, she tried to hide $775,000 of the income she received from her multiple Lifetime series by holding the money in various secret bank accounts. In addition to hiding almost $800,000, she was also accused of smuggling another $120,000 of Australian currency into the country.

Bankruptcy fraud can not only be committed intentionally; it can be committed on complete accident as well. Take for example the instance in which you give an older vehicle to your child so that they can get to and from college. A couple of years later, you fall on hard times and are forced to file bankruptcy. The vehicle you gave to your child a couple of years ago does not even cross your mind. You were financially sound at the time and wanted to help your child. There were no alternative motives involved, but you still unknowingly could be committing bankruptcy fraud by failing to list the vehicle in your petition. This is because giving away an asset such as a vehicle within 5 years of filing bankruptcy can be seen as trying to hide it so that it is not lost when bankruptcy is filed. This is why it is so important to seek the advice of an experienced bankruptcy attorney when facing bankruptcy. Hopefully, errors such as these will be caught before filing bankruptcy. But at the very least, when the error is found after bankruptcy has been filed, your attorney will be able to work with you and your trustee to reach a resolution.

For a free initial bankruptcy consultation, call the Law Office of David M. Goldman, PLLC at (904) 685-1200.

However, don’t get too worried just yet if you have not owned your homestead for 1,215 days. You can still take advantage of the Florida Homestead Exemption and protect up to $125,000 of the equity in your home per Debtor. That means that a couple can still protect up to $250,000 of the equity in their home when filing bankruptcy together, which is still pretty awesome!

But what happens when you file a Chapter 7 Bankruptcy with other real property that is not your homestead? Can that property be protected? How the property is treated will completely depend on whether or not the property is mortgaged and/or if there is any equity in the property. If the property is encumbered by a mortgage and there is no equity in the property, then you should be able to simply continue making those normal monthly mortgage payments, and the bankruptcy should not have any effect on the property whatsoever. However, if there is any equity in the property, then the Trustee will most likely take possession of the property and sell it in order to reach the available equity. Unfortunately, there is no exemption available to protect real property that is not your homestead.