As a debtor’s attorney, one of my goals is to help my client protect as many of their assets as possible when filing for bankruptcy.  The Bankruptcy Code allows us to shelter certain assets by declaring them as exempt.

Interestingly Georgia law, not federal bankruptcy law, determines which assets you may exempt in a case filed in Georgia (there are some limited exceptions to this for filers who have recently moved to or from Georgia).  The Georgia exemption statute may be found at O.C.G.A. 44-13-100.

An asset that frequently needs to be protected is one’s federal and/or state income tax refund.   Because your refund comes in the form of cash, it is not surprising that bankruptcy trustees will try to find a way to grab your refund.  For this reason, I advise my clients to adjust their tax withholdings so that their future tax returns will not show either an overpayment (and thus a refund) or a liability (which will create future budget problems when the tax debt comes due).

If you have a refund due you for the past year, you can use the Georgia “wildcard” exemption to declare that refund as exempt – to a point.  Under the Georgia exemption statute, you can use half of your unused real estate exemption for any property + you get an additional $600 wildcard exemption.  Thus, an individual can declare up to $5,600 of his income tax refunds as exempt.

What happens if a married couple files jointly?  Can they declare up to $11,200 as exempt?  This question came up in a recent case decided by Judge James Sacca of the Northern District of Georgia.  In the Hraga case, the debtors scheduled a tax refund in the amount of $10,388 arising from their 2010 tax returns.  Each debtor claimed 1/2 of the refund ($5,067.99) as exempt property.  The trustee challenged this claim of exemption on the grounds that only Mr. Hraga worked in 2010 and that the entire $10,388 refund was the sole property of Mr. Hraga.

Judge Sacca analyzed the law and noted that Georgia law contains no presumption of equal ownership of property by married couples.  Accordingly, “in Georgia, funds earned by one spouse during a marriage remain the separate property of that spouse unless the spouse transfers an interest in those funds or a court distributes those funds equitably” (i.e., in a divorce or separate maintenance proceeding).

The judge did note that other elements of the tax law (i.e. a first time home owner credit) could contribute to the refund, and thus could alter the percentages – although these other tax considerations did not apply in the Hraga case.

The Hraga’s 2010 tax refund, concluded the judge, must be divided based on the percentage of tax withholdings paid.  In the Hraga’s case, all of the withholdings were paid by Mr. Hraga, so the entire refund is deemed his property.

Because Judge Sacca’s ruling in the Hraga case discusses tax refunds only, it does not address how a bankruptcy judge might address the question of ownership of household goods or even motor vehicles.  I have generally taken the position that non-titled assets and assets that cannot be tied definitively to one spouse should be treated as half owned by each.  But one line in Judge Sacca’s decision does give me pause – he notes that “while the objective of the law in a marital dissolution may be the equitable division of assets between spouses, the objective of bankruptcy law is the equitable distribution of each of a debtor’s assets to each of that debtor’s creditors.”

Is it fair to treat assets as separate property for bankruptcy purposes because one spouse earned the money to purchase that asset (or generated the income to produce a tax refund) but to equitably divide that property in case of divorce?  Does not this approach devalue the contributions of a non-working spouse who stays at home to raise young children?

For now, I will advise my clients that tax refunds are to be allocated to joint filers based on the percentage contribution of the spouse but I will be interested to see if any additional case law arises that addresses how other jointly held marital property is treated for exemption purposes.

Usually, when I meet with a prospective bankruptcy client, the first question I get is “how long will it take me to recover after filing bankruptcy” and the second question I get is “will I have to give up my personal items like furniture and jewelry?”

The “recover from bankruptcy” question is the subject of a different blog post, but I can tell you that in my experience of over 23 years, I rarely, if ever, see anybody lose any of their personal property when they file bankruptcy.

Let’s take jewelry, for example.  In Georgia, you can protect or “exempt” up to $500 worth of jewelry.  This means that you may have $100,000 of credit card debt and you can wipe all of that debt out and still keep your $500 worth of jewelry because under the Georgia exemption statute, this jewelry is exempt.

But wait – there’s more.  If you file jointly with your spouse, each of you gets to claim the $500 exemption, making a total of $1,000.  Further, the exemption law allows you an extra $600 of “wildcard” exemption that can be applied to jewelry, and you can take up to $5,000 of your real estate exemption and apply it to jewelry as well.

Thus, an individual can exempt $500 + $600 + $5,000 = $6,100 worth of jewelry.  A couple filing jointly can protect up to $12,200 worth of jewelry.

What if your jewelry is worth more than $6,100 (individual) or $12,200 (married couple)?  I would advise you to get that jewelry valued.  As Charleston bankruptcy lawyer Russ DeMott points out on his blog, people buying used jewelry want a deal–a really good deal.  That heirloom ring you think is worth $15,000 may fetch only $2,500 from a wholesale jewelry buyer.

I usually refer my clients to visit a jewelry buyer (essentially a high end pawn shop).  While the written estimate you will get won’t make you feel very good about your watches and rings, that low written appraisal will  help convince your bankruptcy trustee that your jewelery is not worth the effort to liquidate.   If the trustee does decide that your jewelry has value, you have the right to take the valuation question to the bankruptcy judge for a ruling, or you can offer to “buy the trustee out” of the estate’s interest – usually by making payments over 6 months to a year of the non-exempt equity.

Further, as Russ points out, if the trustee does want to sell your jewelry, he has to pay you the value of your exemption – which amounts to a lot of work for the trustee unless your jewelry is extraordinarily valuable.

Finally, if you did reach an impasse with your Chapter 7 trustee about your jewelry valuation you can always convert to Chapter 7 and pay back some or all owed to your unsecured creditors and keep your jewelry as of right.

The bottom line – while your jewelry is theoretically at risk, as a practical matter, you are unlikely to lose even a single bauble in bankruptcy.

When I am meeting with clients, I get a lot of questions about retirement plans.  Often, I see clients who have very little equity in property, and even less cash, but they may have $25,000 or $30,000 in an IRA or a 401(k).   How does having several thousand dollars in a retirement plan impact your options regarding a bankruptcy filing?

To answer this question, I am going to point you to a very helpful series of articles written by my colleague Damon Duncan, a bankruptcy lawyer in Charlotte.  Although Damon is writing for the benefit of North Carolina bankruptcy filers, the principles he discusses are applicable to Georgia filings as well:

• If I file bankruptcy will I lose my retirement?
• What is an ERISA qualified retirement plan?
• How do I know if  my 401(k) plan is ERISA qualified?
• Can I take out a 401(k) loan after filing Chapter 13?

Generally, funds in an ERISA qualified retirement plan are considered “exempt” assets.  This means that your retirement plan is protected from the claims of creditors and these funds are protected from the reach of the trustee.  To put this another way, in most cases you could file a Chapter 7 and wipe out $100,000 of credit card debt, but you would exit bankruptcy with your $30,000 IRA intact.

This unique protected status of an ERISA protected retirement plan means that in an attempt to avoid bankruptcy you should never cash out or borrow against a retirement plan to pay dischargeable debt.  Many times over the years I have met with clients who raided their 401(k), IRA or company pension only to delay the inevitable (their bankruptcy filing) by a year or two.

Imagine the sinking feeling of learning that the $50,000 IRA that you cashed out over the past year would have been protected in full had you filed last year at this time.  Now you have no retirement money and you have tax debt arising from the early cash out.

I can’t emphasize this enough – do not cash out or borrow against a retirement plan to pay debts without first talking to a bankruptcy lawyer.  A five minute conversation may save you from a multi-thousand dollar mistake.

As Damon notes in his articles, not every “retirement plan” is exempt and it is always a good idea to get documentation about the plan’s ERISA status prior to filing.   Again, these are questions about which you should not guess and an experienced lawyer will give you the guidance that is appropriate for your filing jurisdiction.

Social Media sites, and Facebook in particular, have changed the practice of law.  Divorce lawyers regularly review the opposing party’s Facebook profile for evidence of adultery or hidden assets.   Prosecutors present online photos to juries as evidence of guilty behavior.  Bill collectors troll social media sites looking for assets and debtors.

And don’t think that limiting access to your profile to “friends” only will help.  Facebook information can easily be subpoenaed – do not assume any right to privacy for your online materials.

How has Facebook and similar sites impacted the world of consumer bankruptcy.  In this guest post, Charlotte bankruptcy lawyer Damon Duncan, identifies three situations where your careless use of Facebook could have serious bankruptcy implications:

Over the past several years social networking sites have exponentially grown at an incredible rate. According to Facebook, they have over 500 million active users spending 700 billion (with a “B”) minutes per month on Facebook. Needless to say, it has a huge audience.  Could some of that audience be members of the United States Trustee’s office or your creditors? Here are three ways Facebook may ruin your bankruptcy:

1.     Personal Property Not Listed

As a part of your bankruptcy you are required to list out your personal property. This personal property may then be protected using federal or state exemptions. Any property not listed or not protected may be seized by the Bankruptcy Trustee.

If you have pictures posted from Christmas showing your new four-wheeler or new big screen television and that personal property is not listed in the bankruptcy petition that was filed in February, then the Trustee may have the ability to seize that property or require you to pay the non-exempt equity in the property.

Instead, what if you file in March and you forget to list the new engagement ring that you get on Valentines Day but have pictures showing your new “bling” and changed your Facebook status from “Dating” to “Engaged to…” the Trustee could (although unlikely) try to come after that engagement ring or make you pay back the non-exempt equity.

2.     Vacations, Trips and Luxury Spending

Another way your social media could damage your chances at a successful bankruptcy filing is if the Trustee or Bankruptcy Court finds out that you have been taking “luxury trips” with your credit cards or other funds. If you post pictures of family trips to the Caribbean or a romantic getaway to Paris, France the courts could require you to pay back the expenses incurred on the vacation. When posting pictures to Facebook then this could raise questions in the Trustee’s eyes as to how you have been spending your money.

3.     New or Unlisted Jobs

If you have filed a Chapter 13 bankruptcy then you should be making monthly payments to the bankruptcy Trustee. Those payments were largely determined by your income and the amount of disposable income you had at the end of each month at the time of your bankruptcy filing.

If you just received a new job offer and are excited to tell family and friends by posting an announcement on your wall about your new job and the pay raise the comes along with it then this could be information that the Chapter 13 bankruptcy Trustee may be able to use to increase your monthly payments. Again, the more money you make should result in more disposable income. The Trustee can then use that extra disposable income to pay back more of your debts.

Along the same lines of getting a new job – what if you have a side business but in your opinion, you don’t make a substantial amount of income from it so you don’t list it down on your bankruptcy petition. Well, if a Trustee finds out about this other business then this income could be recalculated into your monthly income which may push you above the Means Test forcing you to file a Chapter 13 bankruptcy and pay back at least a portion of what you owe to creditors.

Many people have grown to love social media, especially Facebook. It has been a great way to stay in touch with family and friends. Despite that, it has also opened a window that allows others to peer into your personal life. I doubtmany Trustees or creditors are looking up debtors to see if they are telling the truth about their personal assets. However, it can take less than two minutes to find out a lot about a person and their assets by simply lookingonline. Making your profile private is an easy way to keep people from finding out too much information about you. More importantly, be sure to disclose all of your assets and property to your attorney. If they know about your property then they can almost always protect it, or at least put you in the best situation to keep as much of it as possible.

Damon Duncan and Duncan Law, LLC are bankruptcy lawyers in Charlotte, NC.  Visit their web site by clicking on the link or call them at 704-563-1224 begin_of_the_skype_highlighting 704-563-1224 end_of_the_skype_highlighting.

I have written before about the pros and cons of entering into a reaffirmation agreement with one or more of your secured creditors.  On the plus side, reaffirming a secured debt gives you a degree of certainty – you are once again in a contractual relationship with your creditor.  You know how much you are supposed to pay each month and you know the payoff balance, interest rate and terms of the agreement.

Further, you may be able to negotiate a more favorable deal when you reaffirm.  Other than cars, secured creditors are often not set up to liquidate used merchandise and since you already have possession of the property (collateral), many lenders are happy to negotiate more favorable terms with you so they can avoid the hassle of recovering and disposing of property.   This negotiation option is less true with motor vehicles, because there is an active used car market, but the negotiation option can work well when you are dealing with furniture or electronics.

Reaffirmation can also help you rebuild your credit because you are re-assuming personal liability for payments, and regular, timely payments usually will be reported as positive information to the credit bureaus.

On the other hand, when you reaffirm, you are re-obligating yourself personally to pay an installment note.  If you should default, you are fair game for all collection activities including wage garnishment.

Reaffirmation Must be in Writing, Signed by You and the Creditor and Approved by the Bankruptcy Judge

At least once or twice a month, I get an email from a frustrated individual who has received his bankruptcy discharge, and has continued to make monthly payments, but sees no mention at all about these payments on his credit report.

It is not enough that you checked the “reaffirm” box on your bankruptcy Statement of Intention.  You and your creditor have to complete a formal reaffirmation agreement.  These agreements usually consist of about 10 pages of legal speak and your attorney has to document that your budget can handle the reaffirmed payment.  Your attorney also has to sign the reaffirmation agreement and assert in writing that he thinks that reaffirmation is in your best interest.

Usually, reaffirmation agreements are prepared by the creditor or creditor’s attorney.   Sometimes lenders simply will not cooperate – they may not have any objection to accepting your payment and leaving you alone regarding possession, but they may forward a reaffirmation agreement to you.

I have also seen situations where lenders fail to file the signed reaffirmation documents on time and the reaffirmation agreement does not get court approval even though the debtor and his attorney did everything they were supposed to do.

If you and your attorney confer and decide that reaffirming a particular secured debt makes sense for you and that you can afford the reaffirmed payment, you should encourage your lawyer to quickly and aggressively request a reaffirmation agreement from your creditor.  Once your case is discharged and closed, it is difficult and expensive to try to re-open a closed case solely for the purpose of reaffirming a debt.

Because I handle both personal bankruptcy cases and Social Security disability cases, I frequently get questions about the interrelationship between these two areas of law.   A question I get at least once a month has to do with whether a Social Security disability overpayment is dischargeable in bankruptcy.

The short answer to this is “yes,” a Social Security overpayment is treated like any other unsecured debt.    There are exceptions to the dischargeability of a particular debt under Section 523 of the Bankruptcy Code and exceptions to the discharge as a whole under Section 727 of the Code.

Specifically, this means, however, that fraudulent behavior can result in a finding that this Social Security debt is not dischargeable.

Overpayment issues typically arise in disability cases when a claimant continues to accept and receive disability payments even after returning to work.  The question then becomes – “did the debtor/claimant knowingly and with intent to deceive the Social Security Administration continue to accept disability payments even when not entitled to do so?”

A 2009 case decided by Judge Joyce Bihary, chief judge of the Bankruptcy Court for the Northern District of Georgia offers helpful insight into how a bankruptcy judge will analyze this issue.

In the Rodriquez vs. United States of America case, debtor Diego Rodriquez collected over $70,000 of disability benefits after returning to work.   Mr.  Rodriquez filed Chapter 7, then asked the Bankruptcy Court to rule on his request for waiver of overpayment.  Judge Bihary found that the Bankruptcy Court did not have jurisdiction over this issue and denied Mr. Rodriquez’ motion about the waiver issue, but she took the unusual step of addressing some of the substantive issues arising from the overpayment problem.

In what is known as “dicta,” the judge explained that under her understanding of the law, “an overpayment debt of Social Security benefits is dischargeable”  and will be treated like any other unsecured debt.   The judge cited a 1982 7th Circuit case called Neavear v. Schweiker as support for her conclusion.  Since Social Security did not file a timely objection to discharge, the overpayment debt owed by Mr. Rodriquez is dischargeable.

What is interesting to me about this decision are the judge’s discussion of the facts.  Apparently, on several occasions, Mr. Rodriquez attempted to advise Social Security about his return to work, but all of these disclosures were ignored by SSA.  Further, the judge noted that Social Security had put Mr. Rodriquez in limbo by failing to respond to his request for administrative review.

The judge devotes almost a page of her decision to suggestions about how SSA might appropriately satisfy its statutory obligations to Mr. Rodriquez.   Reading between the lines, it seems apparent to me that the judge found Mr. Rodriquez’ testimony credible about his efforts to report his employment income to Social Security, but she did not believe Social Security’s assertions (apparently gleaned from documentation and perhaps testimony) that it had not received notice of employment from Mr. Rodriquez.

The judge references Social Security’s ineptitude regarding file management.  Mr. Rodriquez’ deliquentcy grew so large because “SSA lost debtor’s file for a period of five years.”

In my mind, the obvious question in an overpayment case is this – how can a debtor not be guilty of fraudulent behavior if he accepts Social Security payments while at the same time he is working and earning money.  Wearing my Social Security disability lawyer hat I can tell you that Social Security’s rules about trial work periods, its Ticket to Work program and its extended period of disability and work that does not reach the level of “substantial activity” is by no means intuitive and even a sophisticated claimant would not necessarily know when he might be allowed to keep his disability check as well as his paycheck.

The judge in the Rodriquez case did not reach this issue (because Social Security did not raise it) but I get the sense that the judge felt that in this case at least, the debtor tried to play by the rules but received little cooperation from Social Security and that Social Security’s “unclean hands” might very well be held against the agency in a dischargeability inquiry.

So, what can we learn from the Rodriquez case?  I think that if you are attempting to discharge an overpayment you will need to show that you tried to engage Social Security to resolve the issue prior to filing bankruptcy.   If you were confused by Social Security’s rules it would not be a bad idea to explain your areas of confusion in your correspondence with Social Security.   Finally I would make sure that you and your lawyer identify specific addresses where notice of your bankruptcy filing ought to go.  Social Security is such a bloated bureaucracy that they will most likely not file an objection in time – there is no need to give them added life by not offering notice at the correct address.

Most people know that Chapter 7 allows you to wipe out unsecured debt – credit card bills, medical debt and other signature loans.  But what about secured debt – loans you are still paying to finance your home, your car, perhaps some jewelry or furniture?

This past March, I discussed redemption of property in Chapter 7.   Redemption of property is a viable option but it is far less common than “reaffirmation” of debt.

Why Do You Need to Reaffirm?

Secured loans actually contain two different kinds of obligations.   On one hand, you obligate yourself personally to pay a particular debt.  This is typically in the form of a promissory note.  The second layer of obligation ties the specific item of property to the loan.  This is called a security agreement.

When you file a Chapter 7 and a discharge is issued by the judge, your personal liability on your secured debt is extinguished.  This is why payments on a non-reaffirmed car loan or home loan will not be reflected on your credit reports.  You have no personal obligation to pay.  However, a Chapter 7 discharge does not extinguish the lender’s security interest against property.  This is why a vehicle lender can repossess or a mortgage company may foreclose to recover property.   In such a situation you would not have any personal liability for any deficiency amount.

A reaffirmation serves two main purposes:

1. you will have the certainty of knowing that you are once again in a contractual relationship with the lender.  If you do not reaffirm, you could wake up one day to find that your vehicle has been repossessed or that you are being foreclosed upon.
2. secondly, payments on a reaffirmed debt will appear as positive information on your credit reports.  This means that your credit score will recover more quickly

Can You Negotiate Better Terms in a Reaffirmation?

Because a reaffirmation agreement is a new contract between you and your lender, you absolutely can negotiate different terms.  I have negotiated reduced payments, lower interest rates and reduced balances on furniture, electronics, and vehicles.  I have also negotiated lower payments on 2nd and 3rd mortgages.

It has been my experience that some lenders will just not play ball.   They would rather incur the expense of recovering, storing and reselling a used item.   I think this attitude of  “we do not negotiate with debtors” is silly and counterproductive, but some lenders take this position (I suspect that some of these lenders do not have the staff or protocol for handling a negotiated debt).

On the other hand, many lenders will agree to a deal with terms a lot better than the original contract.  But you do have to ask, and, of course, if you agree to any terms, you must live up to the deal.  Reaffirmation agreements can be canceled by the debtor within 60 days after the agreement is entered, or the case is closed, whichever comes first.