Bankruptcy Code amendments

[Martha]

About a week ago the amendments to the bankruptcy code were passed and I am in the process of figuring them out. A lot of BS. Of some interest to people here are changes in what is exempt from creditors.

The way exemptions work in bankruptcy depends on what state you live in. In some states, when you file bankruptcy you can choose between the state and the federal exemptions. In other states you have to take what the state offers.

If you have the option to take the federal exemptions in your state, there are a number of changes. They cleaned up a lot of the retirement fund issues. If you have any specific questions, feel free to ask since I have to learn it anyway. A couple of points. One is that if you rollover an exempt 401(k) into a traditional IRA, those funds will continue to be exempt, no matter how much money is involved. Also, for non-rollover situations, $1,000,000 in a traditional IRA is exempt.

I am still looking at other plans.

There also was a bunch of changes to discourage state shopping. For example, with some complications, you have to live in a state for 730 days (can't they say two frickin' years?) to claim that state's exemptions. For homesteads there are some complicated limits that go into effect if you switch states or you were a "bad boy" and committed fraud. Still trying to get my arms around these rules.

I have a 300 page summary of all the changes. Anyone want to read?

[Martha]

Also looks like ROTH IRAs are exempt up to the million dollar limit.

[haha]

Good information. And generally good news IMO.

Thanks Martha, our own Earth Goddess and super lawyer.

Mikey

[MRGALT2U]

Yeah, thanks Martha. I think I will pass on your offer to
read it though

JG

[Martha]

More information. Congress did not change the bankruptcy code homestead exemption so it is still $18,450 if single and double that if married.

This does not effect the fact that you can always chose your state exemptions instead of the federal exemptions. Some states are very generous on the homestead exemption but there are some states that have little if any homestead exemption. (Also, you have to worry about how generous the state is with IRAs and annuities).

The bankruptcy code does limit your ability to move to another state, buy an expensive home, and claim that state's generous homestead exemption or any other of its generous exemptions. First, generally you have to live in a state about 2 years to claim its exemptions. And if you buy a home within 1215 days before filing bankruptcy you are limited to a maximum exemption of $125,000 no matter what that state's law provides, unless you sold a home and bought another in the same state.

So, I am thinking that it would work like this:

1. If I move to Florida in 2005, which has an unlimited homestead exemption, buy a home, but get sued for malpractice and file bankrutpcy in 2006, I have to claim the exemptions from my prior state of residence.

2. If I move to Florida in 2005, buy a home in 2005, and file bankruptcy 3 years later, I can't claim more than a 125,000 homestead exemption.

3. If I always lived in Florida, always rented, but finally buy a home in 2005, but file bankrutpcy 3 years later, I am stuck with a 125,000 exemption (I think)

4. If I always lived in Florida, had a million dollar home, sold it in 2005 and bought another million dollar home, my homestead exemption is unlimited even if I filed bankrutpcy the next day.

[unclemick]

Wow - Martha!

You need to stay working - and keep posting the 'good stuff'.

Price is right too!

heh, heh, heh, heh, ----?

[Martha]

Next report: I have seen the press report that the new bankruptcy law protects property held in asset protection trusts. In fact, amendments to the bankruptcy code do not mention these trusts. These trusts are put in place to try to safeguard assets from creditor claims, as well as an estate planning tool. An amendment was proposed to specifically deny protection of these trust assets in bankruptcy. The amendment was defeated. By defeat of the amendment, I suppose you could argue that Congress was indicating its intent not to include in the debtor's bankruptcy estate the beneficial interest in a properly formed domestic asset protection trust.

However, I see nothing to indicate that the trust would be protected from a bankruptcy trustee's claim that the trust was a fraudulent transfer. I also think that a trustee in bankruptcy could easily argue that a trust reserving excessive control to the debtor (or arguably any control) is property of the bankruptcy estate which could be liquidated to pay creditor claims.

So, my initial conclusion on trusts is that the law is unchanged and is still messy, depending on what bankruptcy judge is deciding what and how agressive a trustee you have.