Making Sense of the New Bankruptcy Code and IRA ProtectionsCategory: Finance
Article added by: Cathy Pareto
Erasing your debts just got much harder. Two major decisions have recently passed in
Washington that may have a dramatic impact, positive or negative, on the lives of many
Americans. On April 20, 2005 President Bush signed into law the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. And on April 4th, 2005 the U.S. Supreme court ruled that under the bankruptcy code, IRA balances were protected from creditors in a bankruptcy. Both decisions might radically affect your life and require careful consideration, especially if your profession (ie. Medicine) exposes you to potential litigation. This two part article will expand on some of the recent changes.
Bankruptcy Act
Backed by powerful credit card industry lobbyists, our "friends” on Capital Hill have been busily at work protecting credit card companies at the expense of the consumer. The Act, parts of which are effective immediately and other parts which go into effect on October 17th, 2005, makes it harder for consumers to erase their unsecured debts and requires debtors to seek credit card counseling before being able to file (more on this later). Here are some of the highlights.
By way of background, individuals may declare one of two forms of bankruptcy---Chapter 7 or Chapter 13. Under Chapter 7, individual is permitted to keep certain assets, but all others are relinquished to satisfy cost of bankruptcy and creditor claims. Most debts are discharged completely and debtor is no longer responsible for repayment. Child support, alimony and education loans cannot be discharged and the debtor cannot file again for eight years (bumped up from six years).
Under Chapter 13 bankruptcy, a plan is created under which the debtor will repay outstanding debts within specified time. Usually the amount owed is reduced by the judge so that payments remain manageable and debtor is generally not obligated to relinquish any assets.
Means Testing
The most important factor of the law has to do with the "means test” that bankruptcy filers would be subjected to in order to determine if they qualify for Chapter 7 or Chapter 13. There are two facets of the test that are conducted: the median income test and the means test.
The (personal income) means test is based largely on median state incomes. So if the combined gross household income is greater than the median income in your state, the law prevents your from filing Chapter 7 (completely eliminating your debt) and may force you to file a Chapter 13 plan. So, for example a Florida physician supporting this family would be subjected to a state median of only $58,605. If the combined income in the physician’s household is more than the state’s median income threshold (and, of course it is), then you do have to apply the Mean’s Test, and to do so you need to calculate Monthly Expenses. To find out what the state median income
levels are, click here.
The second test checks to see if the debtor’s current monthly income (reduced by allowed
expenses) exceeds an amount allowed under the Act for a family of the same size. The means test is basically an "excess income” test used to determine what money is left over after deducting reasonable expenses that can be used to pay unsecured creditors.
Included within the calculation of debtor’s monthly expenses are: 1) reasonably necessary
expenses incurred to maintain the safety of the debtor and the debtor’s family (see link below); 2) continuation of actual expenses paid by the debtor for the care and support of an elderly, chronically ill, or disabled household or nondependent immediate family member; and 3) an additional allowance for housing and utilities based upon documented home energy expenses.
Individuals may use the "National Standards for Allowable Living Expenses” charts available on the IRS website to determine the standards for food, clothing and other items. The chart is based on the individuals gross monthly income.
If a Debtor’s income meets or exceeds the mean’s test, then any Ch 13 Plan must have duration for at least five years unless the plan provides that all allowed unsecured claims are to be paid in full over a shorter term.
Credit Counseling
The other critical (and controversial) matter is the mandatory requirement that debtors go through credit counseling in order to qualify for bankruptcy, and counseling must start at least 180 days before filing for federal bankruptcy protection. This particular portion of the Act is quite disturbing, given that the credit counseling industry is not only unregulated, but in fact is beset with unimaginable fraud and abuse by "bad players”. . There are too many counseling agencies out there posing as non-profits that get away with grossly overcharging clients for services, implementing absurd monthly fees, and do little to negotiate with the credit card companies to reduce rates and/or debt. Credit counseling agencies are supposed to help consumers out of debt; many in fact, make the problems worse. Basically, Congress just paved the way for unknowing consumers to be thrown into the lion’s den in an already corrupt system. Their mission, I’m sure, was accomplished as soon as they secured sizable contributions from credit card companies in exchange for this law.
Homestead Protection
The Act also modified some of the protections offered by the previous Homestead Exception
(which is already in effect).
•Any addition to the value of a homestead that is funded by nonexempt property, and made with the intent to hinder, delay, or defraud creditors, is not protected by the state homestead
exemption if it was made during the ten year period before a debtor filed for bankruptcy.
•Any homestead property purchased within three years and four months (or 1,215 days) of a filing date is only exempt up to $125,000. The exception to the rule, however, is if the debtor already lived in the same state and merely transferred his/her interest from a previous principal residence.
•There is a $125,000 cap on the homestead exemption for any debtor convicted of a felony which demonstrates bankruptcy abuse, or if the debtor owes a debt arising from violation of Federal or State securities laws, criminal act, intentional tort, or willful or reckless misconduct that caused serious physical injury or death to another individual during the last five years.
Fraudulent Transfers
Fraudulent transfers are asset transfers that are made with the intent to defraud a creditor (or potential creditor). It is not a criminal activity, but the transaction may be reversed by a judge and therefore make the assets accessible to your creditor
The look back period in which certain transfers are deemed to be fraudulent and recoverable
under the Bankruptcy Code was increased from one to two years. However, state fraudulent
conveyance laws often allow the bankruptcy trustee to go back even further. The two year period applies only to cases filed twelve months or more after enactment of the Act.
Part two of my article in the next newsletter will specifically discuss the impact that the 2005
Bankruptcy Act and the Supreme Court decision will have on IRA’s and other retirement plans.
Posted By: Cathy Pareto
Web: http://www.cathypareto.com
Contact: e-mail
| About the Author: |
| Cathy Pareto, MBA, CFP®, AIF® is the Founder and President of Cathy Pareto & Associates, Inc. a Financial Planning and Investment Management Firm. www.cathpareto.com
For over twelve years, Cathy has been helping financial consumers and professionals understand the world of investments and finance with a sound, but down to earth money management approach. Money management does not have to be an intimidating and mystifying process. Cathy's belief is that there is more
to investment management and financial planning than just the numbers. It takes commitment, clear communication and trust between the Advisor and the Client to plan out a strategy, and it requires the experience of a competent Advisor to execute that strategy.
For over a decade Cathy was a Senior Financial Advisor for another Miami based investment advisory firm, where she managed over $200 million in assets for high net worth clients and retirement plans. She has extensive experience in retirement issues, asset allocation, investment selection, investment management, education planning, estate planning coordination, and asset protection strategies. Additionally,
she was an Adjunct Professor and Faculty Coordinator for the CFP® Program at Florida International University’s College of Business.
Educational Background
Cathy earned her BA in Finance and later her Executive MBA at Florida International University, graduating in the top 20% of her class and as a result she was inducted into the prestigious Beta Gamma Sigma Graduate Business Honors Society.
In the Media
Cathy Pareto’s articles have been published in periodicals and websites, including Women in Business,Investopedia.com, Miami Medicine, Florida Medical Business, AccountantsWorld.com, My Financial Advisor, Indexfunds.com, and Fundsinteracctive.com. Her media contributions include quotes in BusinessWeek, The Wall Street Journal, The Sun Sentinel, CNNfn, Latina Magazine, Hispanic Trends, AARP's
Segunda Edad, and many other financial publications. She has appeared on television and radio shows including CNBC’s “Power Lunch”, WLRN/NPR’s “Topical Currents", “Wealth & Wisdom”, Total Picture Radio, Landed Radio and more.
Professional Memberships
Greater Miami Estate Planning Council - Current Member of the Board of
Directors
United Way of Miami Dade Young Leaders - Current Member
NAPFA National Association of Personal Financial Advisors - Current South
East Region Board Member
Florida International University Executive MBA - Current Member of
Professional Advisory Board
Financial Planning Association - Current Member |
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