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.

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.

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.

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.

The term “exemptions” refers to property you own that is protected from the reach of the trustee or creditors.   For example, every state provides for exemptions that include your clothes, a certain amount of household goods, a certain amount of equity your car, and a certain amount of equity in your home.   Georgia has fairly stingy exemptions – you can read the Georgia exemption law by clicking on the link.

When property is declared as exempt, it does not count for purposes of counting up your assets.   If you own property that exceeds the exemption available to you, that property could be seized and sold by a Chapter 7 trustee or it could force you to pay back a higher percentage of your unsecured debt in a Chapter 13.  Exemption planning and exemption calculation are important functions for consumer bankruptcy lawyers.

The Supreme Court decision in Schwab v. Reilly requires debtors and their attorneys to be more exact when identifying exemptions, and applies to cases filed in Georgia and everywhere else in the United States.   The article that follows is a guest post written for this blog by Brandon Moreno, Vice President of the Utah Bankruptcy Hotline.  The Utah Bankruptcy Hotline maintains a network of unaffiliated Utah bankruptcy lawyers who provide debt relief and bankruptcy counsel to consumers in Utah.

On June 17, in Schwab v. Reilly, the U.S. Supreme Court issued a decision that limits the extent to which individuals filing under Chapter 7 can exempt their property from the bankruptcy estate.  The case arose out of the interplay between two important rules.  One imposes dollar-value limits on the extent to which a debtor can exempt certain types of property.  The other requires interested parties to object to a debtor’s claimed exemptions within 30 days after the conclusion of the creditors’ meeting, or else lose the ability to retain any of that property for the bankruptcy estate.

The question in Schwab was, what happens when a debtor both reports an asset with an estimated market value and claims an exemption for the asset equal to the market value, the trustee does not object because the claimed exemption falls within the applicable-dollar value limit, and it later becomes apparent that the asset’s true market value exceeds the claimed value and the applicable dollar-value limit?  According to some lower courts, the trustee’s failure to object entitled the debtor to an exemption equal to the entire market value, regardless of whether that value exceeded the limit imposed by the rules.  In Schwab, however, the Supreme Court rejected that approach.  According to the Court, the trustee need not have objected to the exemption to preserve the estate’s ability to recover value in the asset beyond the value the debtor declared exempt.  The rationale for this conclusion was that the trustee had no basis for objecting in the first place–on its face, the exemption appeared to comply with the limit imposed by the rules, and there was no way of knowing beforehand that the asset would appreciate in value beyond the limit.

The Court’s analysis was somewhat complex, but an example helps to illustrate the effect of the ruling.  Imagine that an individual files for Chapter 7 protection and reports an asset–in this example, office equipment–to which he assigns an estimated market value of $5,000, that he claims a $5,000 exemption for the equipment, and that the applicable dollar-value limit on office equipment exemptions is also $5,000.  Given the dollar-value limit, the trustee concludes that the claimed exemption is appropriate and therefore does not object.  The thirty-day objection period then passes, and a third-party appraises the equipment and assigns a market value of $8,000.  Under the prior approach of some lower courts, the trustee’s failure to object would have entitled the debtor to an $8,000 exemption for the equipment.  But Schwab invalidates that approach and establishes that the debtor will be entitled to an office equipment exemption of $5,000, even though the true value of the equipment exceeds that amount by $3,000.  The $3,000 remainder goes to the bankruptcy estate, to be distributed among the creditors.

For individuals contemplating Chapter 7 bankruptcy, the lesson of Schwab is twofold:  First, even if you accurately report an asset’s value and claim a valid exemption equal to that value, you cannot later capture any serendipitous increase in value beyond the limits imposed by the rules.  Second, if for some reason it is important to you to exempt the full market value of an asset or the asset itself, rather than a particular monetized interest in the asset, Schwab suggests that it might be appropriate to claim an exemption for “full fair market value (FMV)” or “100% of FMV.”  Thus, going back to the example above, the debtor might try to claim an exemption of “100% of FMV” for his office equipment, rather than $5,000.  A court could reject this claim if it later became apparent that fair market value exceeds the $5,000 limit.  But Schwab also suggests that phrasing an exemption claim in this manner effectively places other parties on notice that the debtor seeks to exempt the entirety of the asset’s value. If a debtor provides this notice and others nevertheless fail to object, the debtor may be able to keep a subsequent increase in market value beyond the otherwise applicable dollar limit.

Generally when the owner of a small business leases retail space, the landlord will demand a personal guarantee.  This means, of course, that in the event of a default, the business (which may be a corporation or LLC) faces liability and the business owner personally faces liability.

Given this reality, every small business owner should seek counsel to discussion asset protection options before starting his business, but that is a topic for another day.

If the business fails you might be surprised to learn that the landlord does not necessarily have to take any steps to “mitigate damages” by releasing the retail space.  Instead, the landlord can demand payment for the full value of the lease from the business owner personally.  If the business owner has a house with $100,000 of equity, that equity is therefore at risk, and given that Georgia’s bankruptcy exemption statute is stingy ($10,000 for an individual or $20,000 for a married couple filing jointly), bankruptcy may not offer much protection.

I ran across two helpful resources that go into more detail about the landlord’s obligations or lack thereof.  The first is a blog post from Atlanta lawyer David Pardue in his Georgia Real Estate Litigation blog.  In his post, David discusses a recent Georgia Court of Appeals case called Sirdah v. North Springs Assocs., LLLP, which was decided by the Court of Appeals in June, 2010.  In the Sirdah case, the Court restated its previous holding that a landlord is under no duty to mitigate damages unless (1) the landlord accepts the tenant’s surrender, or (2) the tenant successfully terminates the lease.  In the Sirdah case, the tenant returned his keys to the landlord and argued that by accepting the keys, the landlord accepted the tenant’s surrender.  The Court said that accepting the keys did not constitute an acceptance of the surrender.

Another helpful resource is a more extensive article written by attorney Stephanie Everett of the Bloom Law Firm in Atlanta.  In this paper, Stephanie examines the various scenarios that could arise when a tenant breaches a lease and the resulting consequences.  Although Stephanie’s article is written for the benefit of landlords, tenants will find the information very helpful as well.

As the law in this area could change, you should not rely on these resources in the absence of counsel.  If you are a small business owner and you are coming to the realization that your business may not survive, you would be wise to consult with a lawyer to discuss your options both in business and in terms of bankruptcy.  I have seen far too many business owners who simply left and discovered after the fact that their bankruptcy options were limited, or too painful.

First, it does make a difference whether the small business is incorporated.  If your small business is a proprietorship (i.e. “Tom Smith d/b/a Tom’s Lawncare”) then there is no way to separate personal assets and debts from business assets and debts.  In this situation, all debts are “personal” because the proprietorship does not have a separate identity from the individual.  All debts would have to be listed – for bankruptcy purposes in this situation, there is no difference between your personal credit card debt that arises from gasoline and grocery purchases and a credit card that you use for business purchases.

Assets of the proprietorship would be considered personal assets – assets that do not fit within the Georgia exemption statute would be at risk.

In a Chapter 7, if you have non-exempt assets you would have to surrender those assets to the trustee or offer to buy the “estate’s interest” from the trustee (usually at a discount from fair market value).

Note that any receivables of the business or any other property with potential resale value (i.e. customer lists, pending contracts) could be claimed as estate assets.

In rare instances a Chapter 7 trustee could object to your small business bankruptcy using an “income suppression” argument.  This argument asserts that you should not be eligible for bankruptcy relief because you have intentionally suppressed your income by leaving a highly paid job or intentionally refused to maximize income opportunities.

If you are incorporated, the shares of your business are assets and you may very well be asked to justify a de minimus (i.e. $500) valuation that you put on those shares.   I see this issue frequently when clients own service businesses.  For example, I recently represented a client in an incorporated service business that had about $75,000 worth of equipment, but also had around $80,000 of credit card debt, $2,000 of tax debt and was behind on rent and facing a possible eviction.  What is the value of the shares in this case?   Is it $75,000 under the theory that the equipment was not subject to any lien and could be liquidated?  Is it zero under the theory that the business (and my client as personal guarantor) could be liable for a fraudulent transfer if it liquidated the equipment when the business was insolvent?  Or is the value somewhere in between zero and $75,000 using a compromise argument?

The income suppression argument described above also applies when the individual debtor’s business is incorporated.  I have seen trustees take the position that a debtor with a certain level of education and training should make a reasonable effort to monitize that education rather than chase an entrepreneurial dream at the expense of creditors.

In the case of an incorporated business where the debtor has partners, the Chapter 7 trustee may become a replacement partner by virtue of his trustee powers and thereafter force a liquidation or a buyout.

I usually advise my clients who own small business clients that there is a possibility that the trustee may demand that the business close its doors and that they may have to find a new line of work.  This possibility is less likely if the business is a service business that does not involve hard assets or inventory, and more likely if there are business assets with value or receivables.

Needless to say there are a myriad of potential issues for small business owners who are thinking about filing a personal bankruptcy.  As always, you will benefit greatly by seeking counsel before your situation becomes critical.

Blog reader Shelley writes as follows:

I am the mom in a family of 4 with a disabled husband.  Recently my father died and left me a lump sum of money. I have been told that before I can file bankruptcy, I will have to use up this money until it is  gone..which means i would not be able to give my children a head start for college or to help their families through the bad times where they cannot find work etc..is there a way around this at all?

Here is my response: if you inherit money, whether or not the money has been distributed to you, that inheritance is considered as an asset of the estate.  Under Georgia law, you can shelter some of that money – $5,400 under the “wildcard” provision, but that is it.  If you were to file Chapter 7, the trustee would seize this cash and use it to pay the claims of unsecured creditors.

What can you do?   With guidance from a lawyer you could seek to protect the inheritance money by taking advantage of available shelters.  For example, under Georgia law, an IRA may be completely exempt.   Arguably you could transfer some of that money into an exempt IRA or education IRA, which would therefore change its character from non-exempt to exempt.

You have to be very careful about doing this, however.  There can be a fine line between acceptable pre-bankruptcy planning and preparation and bankruptcy fraud.   Clearly you want to be on the correct side of this line.

This is one of those situations where you need to make an appointment and pay a knowledgeable bankruptcy lawyer to advise you as your options regarding use or spending of the inheritance money.

Escrowing taxes and insurance can also help if you do not have the discipline or cash flow to save up several thousand dollars every year to pay these costs.  The mortgage payment alone should not be seen as the sole cost of owning property – I think it is wise for any prospective homeowner to prepare a detailed budget with projections for all home ownership costs – taxes, insurance, maintenance, increased utility costs, repairs, etc.

My Bankruptcy Law Network colleague, Texas attorney Pam Stewart recently published a valuable post entitled “Is your Mortgage Company Collecting the Right Amount of Taxes?”   Her post relates to Texas law, but the principle applies in Georgia as well.  Georgia offers homeowners age 65 and older a  series of property tax breaks. Some of these breaks apply when you hit age 62.  There are other breaks that apply to disabled veterans.  You should not assume that your mortgage company knows that you are age 62 or 65 or that they have the correct information about exemptions to which you may be entitled.

If you file your bankruptcy after January 1, that income tax refund needs to be declared as an asset.

Often, income tax refunds can be protected by applying an “exemption.”  Georgia has a fairly stingy exemption law, so if your refund totals more than $500 or $600, you should seek advice from your lawyer about whether your refund can be protected, and, if not, whether you should file your return, obtain your refund and use the money without putting yourself at risk.

Going forward, I usually encourage my clients to review their withholding numbers so as to avoid ending up with a large refund.   If you are getting a tax refund, that means you are giving the government an interest free loan.  In addition, if your refund is in the $4,000 to $5,000 range, the Chapter 7 trustee will take the position that you are using it as a kind of savings account and the trustee might object to your case on the grounds that you have unrevealed “disposable income.”

In Chapter 13, the Atlanta trustees generally require a provision that directs the IRS to send all tax refunds to the trustee, so there is no advantage in setting your withholdings to create a large tax refund.

Bottom line: tax refunds can create bankruptcy issues, and the more time you have to plan how to deal with your refund, the better.