One of the less well known components of the BAPCA bankruptcy law changes has to do with exemptions. Exemptions, as you may know, refer to those assets that are sheltered from seizure by the trustee. You can read more about the Georgia exemptions on my Georgia bankruptcy law web site.
For example, in Georgia, you can shelter $5,000 in household goods, as long as no individual item is worth more than $300. Therefore, for practical purposes, your television, stereo, clothing, clock radio, etc. is not at risk.
One of the most important exemptions has to do with your home. In Georgia, you can shelter $10,000 of equity in your home ($20,000 of equity if you file jointly with your spouse). In other States, however, the "homestead exemption" may be much larger. For example, in Florida, your can declare as exempt 100% of your equity.
Thus, two identical debtors, one who lives in Georgia and one who lives in Florida, could have very different bankruptcy experiences. The Florida debtor could own a $250,000 house free and clear and still qualify for Chapter 7 without risking his house, whereas the Georgia debtor would lose his house to the trustee.
Because of this disparity in exemption rules, Congress changed the Code to provide that a debtor who moves from one State to another must use the first State's exemption laws for two years. After he has been a resident of the new State for two years, he must use the new State's laws. The purpose of this change was to stop people from moving to States like Florida to shelter their assets in real estate.
Florida attorney Jonathan Alper raises an interesting question in his blog about what happens if an individual moves to Florida, buys a house then encumbers his new homestead with a home equity line of credit in his spouse's name. Jonathan has one opinion about the repurcussions and I have another, but the point here is that when new rules are created, there are always going to be fact patterns that no one expected and that may result in unexpected or undesireable results. My sense is that there are going to be a lot of these unknowns in the new law and we are just starting to see some of them work their way up the appellate system. My colleague Scott Riddle publishes a blog that looks at some of these new developments in the law and I read it regularly to keep up to speed.
Technorati Tags: georgia exemptions, O.C.G.A. 44-13-100, filing bankruptcy in new State, Jonathan Alper
Filed under Fraudulent transfers, Georgia Bankruptcy, Protected property issues by 
A recently widowed, elderly woman qualifies for Chapter 7 under the median income/means test but is concerned that the Chapter 7 trustee will assert a claim on the $35,000 insurance proceeds she is expecting following the death of her husband. The woman needs to file a Chapter 7 to get rid of credit card and medical debt. Are the insurance proceeds exempt?
Here is my take: I read 44-13-100(11)(C) as the applicable Code section. The statute reads as follows:
A payment under a life insurance contract that insured the life of an individual of whom the debtor was a dependent on the date of such individual's death, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor.
It appears therefore that the potential debtor must must qualify as a "dependent" and that the funds are "reasonably necessary" for her support.
I suspect that the question of whether she is a dependent will be a facts and circumstances test. I don't know what the case law says about this but my guess is that if the widow can show that she relied upon her husband for support then she would qualify as a dependent.
With regard to the "reasonably necessary" issue, I have been involved in several cases where a lump sum workers comp settlement of $75,000+ or a Social Security past due benefit check of $25,000+ was declared fully exempt based on the argument that the debtor would need this money for future medical care and to make up for loss of work capacity.
In all of these cases the bankruptcy judges were willing to exempt the full amount of the settlement. What we did was to make a math argument that the funds would be used for (1) regular living expenses, (2) future medical care (3) housing modifications, etc.
Here, I suspect that the prospective debtor could identify a monthly figure by finding out how much the debtor could expect to receive from an annuity if she took the life insurance proceeds and invested them or by dividing the settlement by the number of months left in her expected lifespan and plug that into her budget.
The bottom line – I think the debtor needs to be advised that there is some risk that her bankruptcy judge will find some of her life insurance proceeds non-exempt. I don't think that it is a big risk but there is some risk nonetheless. She also needs to be advised that this issue will probably have to be argued. My sense is that the US Trustee has been using the IRS as a model for addressing assets in Ch. 7 cases and in an IRS setting (Offer in Compromise or Installment Agreement) the insurance proceeds would be in play for the IRS. How much influence the IRS policies are having on the U.S. Trustees is an unknown.
Thanks to my colleague Scott Riddle for raising this interesting and relevant question for discussion. Scott and I frequently engage in e-mail discussions to brainstorm possible issues in cases and this blog post is derived from one of those discussions. Any errors in this analysis is mine alone. Scott publishes a very comprehensive and interesting blog called the Georgia Bankruptcy blog which I recommend to any lawyer or potential debtor who is interested in Georgia bankruptcy law.
Technorati Tags: insurance proceeds and Chapter 7 bankruptcy, life insurance proceeds and bankruptcy exemption, Scott Riddle, reasonably necessary for support of the debtor
Filed under Georgia Bankruptcy, Protected property issues by
Florida Attorney Jonathan Alper discusses in his Florida Bankruptcy blog several important considerations if you are thinking about turning to a family member to help you buy a car prior to filing bankruptcy. In a scenario I have seen on occasion, Jonathan describes meeting with a client who had asked his parents to help him buy a car. The parents bought the car, but titled it in the debtor (son's) name and never recorded a lien to secure their loan to the son.
In this situation, the "loan" from the parents is unsecured (no different than a credit card) and, worse, the son cannot include the monthly car payment as a secured debt for means test purposes. For bankruptcy purposes, therefore, this car is owned free and clear by the son/debtor and it counts as an asset.
The big picture point here, I think, is that if you are thinking about filing for bankruptcy, you should never take drastic action like buying or selling a car or house without first speaking to your lawyer. Even if those recent transactions can be reversed, they may still count against you in Bankruptcy Court.
Technorati Tags: family car loans, means test, pre-bankruptcy planning, Chapter 7, Georgia bankruptcy, Georgia Chapter 7
Filed under Georgia Bankruptcy, Means Test issues, Protected property issues by
Hi Jonathan, Many thanks for your good website!
I’m not in any immediate danger of bankruptcy (credit score 770), but if I get downsized and can’t get another job, which is somewhat probable, then I may need to consider Chapter 7. My main concern is that my wife has a 401K (she is now retired) and we’d like to move it to an IRA. It’s all we have and it’s worth about $100,000. We have no equity in our house or anything else other than her small retirement income ($2,400 a month). We can have much better investment options in the IRA than the 401K and would like to transfer the funds but I’m worried that the courts, especially in GA, would not respect the IRA whereas they would respect the 401K (Delta Air Lines was her employer). I did a Google search and just can’t find a definite answer. It seems that in Georgia, the trustee can go after an IRA if the person funded it themselves, but if the IRA were funded from a 401K that was ERISA, then the IRA would be protected as well. Does this make sense to you? Would you please be so kind as to clarify and perhaps post this on your blog? Many thanks for your kind consideration and assistance. Best wishes to you and your practice.
–Richard
Richard – thanks for your question. The case in the Northern District of Georgia that most closely mirrors your facts is the Hipple case in which Judge Cotton found that a SEP/IRA with an “anti-alientation” clause was excluded from the debtor’s estate pursuant to Section 541(c)(2) of the Bankruptcy Code and was therefore an exempt asset pursuant to Georgia Code Section 44-13-100. Since Hipple was issued, I have regularly used it to declare undistributed funds in an IRA as exempt. Also note that the Georgia exemption statute specifically declares as exempt “an individual retirement account within the meaning of Title 26 U.S.C. Section 408.”
I would point out, however, that the 2005 revision to the Bankruptcy Code did not change Bankruptcy Code Section 541(c)(2), but it did substantially change Section 541(b). Section 541(b) identifies property that is not included in property of the estate (and therefore exempt). I see nothing in the new Section 541(b) that overrules Hipple, but it is also too early (as I write this in March, 2006) to know if any trustee or creditor will try an end run around Hipple.
So, the bottom line in my view is that right now I am still declaring IRAs, including rollover IRAs as exempt pursuant to Hipple and O.C.G.A. Section 44-13-100. Should I have a case in front of me like yours involving someone’s life savings, I would most likely want to research the issue to be able to offer a more definite opinion.
Filed under Georgia Bankruptcy, Protected property issues by
