Archives for September 2013

Ways That You Can Risk Losing Your IRA in a Bankruptcy Filing

How an Individual Retirement Account Can Lose Its Protection in Bankruptcy

Under the revisions to the Bankruptcy Code in 2005, individual retirement accounts (IRA’s) are exempt from attachment in a bankruptcy up to a specific dollar amount. Accordingly, those funds generally cannot be seized by the bankruptcy court or trustee, and used to pay your creditors. In New Jersey, IRA’s have broader protection as “excluded” assets. See NJSA 25:2-1(b). There may be circumstances or transactions, however, that could provide a trustee an opportunity to seize IRA funds.

Using Money from an IRA Rollover

Suppose that you have funds from one IRA that you want to roll over into another IRA. Under the law, you have 60 days to roll those funds over without incurring penalties or tax consequences. If you use those funds to pay for living expenses or other immediate needs, but replace them with income earned during the 60 day period, the trustee could argue that the rollover funds amounted to a savings account equivalent, and should, therefore, be accessible to creditors. There are reports that trustees have made this very argument, though no reported rulings yet on whether this attempt will be successful.

The best advice is not to use rollover funds for any purpose, unless you are prepared to lose them. You should place rollover funds in a separate account and leave them untouched until they are transferred to the new retirement account.

Making Fraudulent Transfers into Retirement Funds

The protection for IRA’s can be lost if contributions can be characterized as a “fraudulent transfer” used to evade payment of debts. There are annual limits to the maximum allowable tax free contributions thad can be made to such accounts. Exceeding those dollar amounts is a sure-fire way to attract assertions that the transfers were fraudulent to creditors. This could result in the loss of the protection IRA accounts enjoy.Inherited IRA accounts may not be protected.

When someone other than your spouse dies and has named you as the beneficiary of their IRA, one of your options is to transfer the funds into an “IRA Beneficiary Designated Account” or “IRA-BDA” account. There are major tax advantages to doing this. However, unlike a regular IRA, these funds are freely available without penalty. Several courts have recently held that these accounts are more like regular investment accounts and do not have the protection afforded to IRA’s. The question is still open in New Jersey, where New Jersey law has been held to extend extra protection to IRA’s created under specified sections of the Internal Revenue Code.

We are not tax advisers. These are matters that should be reviewed by a tax professional.

IRS CIRCULAR 230 DISCLOSURE: Pursuant to Treasury Regulations, any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used or relied upon by you or any other person, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any tax advice addressed herein

Contact Neuner & Ventura, LLP

We understand the stress, anxiety and confusion that can be associated with a potential bankruptcy filing. We offer a free initial consultation to every client. For an appointment, call Neuner & Ventura at (856) 596-2828 or send us an e-mail. We do, however, reserve the right to charge a fee to review any work done by another attorney. Evening and weekend appointments are available upon request.

Representing Clients across South Jersey

How a Chapter 20 bankruptcy can help save a home from foreclosure after a Chapter 7 discharge

You were drowning in debt. Your home had two mortgages that together were more than the house was worth. You were falling behind on both trying to stay ahead of your creditors. A Chapter 7 bankruptcy discharged the credit card and other unsecured debt making things easier.

But you are still behind on those mortgages and a foreclosure is underway or threatened.

A Chapter 20 might work. Chapter 20 (7+ 13) is a Chapter 13 bankruptcy after a Chapter 7 discharge. The purpose is not to get a second discharge but to be given 3 to 5 years to catch up on that mortgage and maybe save your home. Not all courts will let you do this, but the trend in New Jersey is to allow a Chapter 20 if it serves a legitimate rehabilitative purpose. The process can be tricky though.

First, you need to have disposable income (ie money left over after paying basic living expenses). Usually, this is because after your Chapter 7 filing, you got a job or your income increased substantially.

Second, you cannot have more than $383,175 in non-contingent liquidated unsecured debt. This can include the amount of any shortfall between a mortgage balance and the value of the real estate net of prior mortgages.

But here is what is possible. First, if you are behind on mortgage payments and no Sheriff Sale has taken place, you can take up to 5 years to bring the loan current, providing you start paying again on time once the new bankruptcy is filed, and do not miss payments.

Under certain circumstances, you can “strip off” [ie remove] a second or third mortgage if the value of the home is less than the first mortgage or second mortgage that is ahead of the one you want to get rid off. If this is successful, the stripped-off mortgage is removed from the home.

An open question is whether in a Chapter 20 the stripped off mortgage results in a new payment obligation which has to be dealt with in the plan. After all, the personal payment obligation was discharged in the Chapter 7. But a New Jersey court has held that in a Chapter 20 strip-off, the mortgage debt is converted to a new payment obligation. (This was the subject of a previous article, If the stripped off mortgage balance is too large, at least one court in New Jersey has held that it can result in disqualification for Chapter 13 relief.

It is always better if possible to file a Chapter 13 first rather than a Chapter 20. But if there were good reasons that was not possible, a Chapter 20 can be a viable option for many people to save their home.

At Neuner and Ventura LLP, we have the experience needed to help people in financial trouble take back control of their life. If we can help, please feel free to call us at (856) 596-2828.

U.S. Court of Appeals Reverses Ruling in Bankruptcy Case Involving Inherited IRA Funds

U.S. Court of Appeals Reverses Ruling in Bankruptcy Case Involving Inherited IRA Funds
On April 23, 2013, the U.S. Court of Appeals for the 7th Circuit reversed a District Court ruling and reinstated a determination by a bankruptcy court that inherited IRA funds were no longer “retirement funds” and thereby exempt or protected from creditors in a bankruptcy proceeding.

Generally, IRA’s are either exempt from claims of creditors in bankruptcy, or in New Jersey, are completely disregarded as “property of the bankruptcy estate”. This decision shows that inherited IRA’s (called IRA-BDA accounts) are a different animal. How they are treated and whether they can be seized by a bankruptcy trustee to pay creditors can be a critical issue.

The Facts

Heidi Heffron-Clark’s mother, Ruth Heffron, owned, at the time of her death, an individual retirement account worth approximately $300,000. Her IRA went Heffron-Clark. According to tax laws, the IRA remains a tax-sheltered investment, but with limitations. There can be no new contributions to the IRA and it cannot be rolled over into any other account. In addition, federal law requires that “minimum required distributions” take place from the IRA starting no later than one year after the death of the original owner (Ruth Heffron).

After receiving the inherited IRA, Heffron-Clark and her husband filed for bankruptcy protection. In that petition, they claimed that the IRA funds were exempt from the reach of the bankruptcy courts as “retirement funds.” The bankruptcy court judge disagreed, concluding that the funds were never held as “retirement funds” by Heffron-Clark and by law must be distributed. Heffron-Clark appealed to the District Court, which reversed the bankruptcy court ruling, citing a prior opinion that held that “retirement funds” in a decedent’s hands must also be treated as “retirement funds in the hands of a beneficiary.”

The Court of Appeals overturned the District Court ruling, stating that upon the death of an IRA’s owner, those funds are no longer anyone’s “retirement funds.” To hold otherwise, the court concluded, would be to allow a debtor free access to a substantial pot of money never intended for their retirement. The court held that inherited funds in the form of an IRA are still inherited funds and are not a form of retirement funds under bankruptcy law.

This issue is one likely to end up before the Supreme Court if Congress does not address it. Right now there is a disagreement between the Circuit Courts of Appeal that have addressed this issue. Stay tuned.

Bankruptcy & Law Suits

Contact Neuner & Ventura, LLP

Let us help you take back control of your life! We understand the stress, anxiety and confusion that can be associated with a potential bankruptcy filing. We offer a free initial consultation to every new potential bankruptcy client. (We do, however, reserve the right to charge a fee to review any work done by another attorney). For an appointment, call Neuner & Ventura at (856) 596-2828 or send us an e-mail. Evening and weekend appointments are available upon request.

Representing Clients across South Jersey

Staying the course on the road back to work, and getting the fresh start you need once you get there

I recommend this recent article in the New York Time about overcoming frustration in trying to get back in the job market. It is well written and right on point. http://www.nytimes.com/2013/09/01/jobs/conquering-frustration-on-the-road-back-to-work.html?_r=0. So very often, the people I see have had the financial legs cut out from under them, and I give some of the same advice: accept the realities of where you are and work from there back to a place of personal and financial stability. Saying it, I know,  does not make doing it any easier to do.

The good news, from my experience, is that most people can and will get back on their feet and eventually get back to financial stability. There are, however, some tough choices to make along the way. But time and again, I have seen people who make it.

The bad news is that the financial damage from a period of unemployment has to be dealt with or it can scuttle the entire effort as debt collectors take away needed income or property. Very often, a bankruptcy is the best way to do that. This is what the bankruptcy system is for: to give people who need it a fresh start so they can get back to being productive and self supporting. Otherwise, people saddled with too much debt and forced to downsize due to reduced income are threatened with debt collectors who can stymie their efforts to get back on their feet.

Not every bankruptcy needs to result in creditors not getting paid. If an individual has the  disposable income, a Chapter 13 bankruptcy provides a controlled and controllable path to debt settlement by repaying what  can be repaid (usually without interest) over 3 to 5 years. Others cannot even do that and need Chapter 7.

But confronting the situation and carefully considering all the options is the best thing those who have been out of work can do. Qualified attorneys who take the time to make sure the job is done right are just what is needed.

If you are facing, or even ending, a period of unemployment, we can help you look at all the options. Bankruptcy may not be right for you, but it is worth looking at, along with the other options.

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