Should 401k and IRA Plans be Put in a Revocable Living Trust?

A common question people ask when they come in to do an Estate Plan is whether their retirement benefits i.e. the 401K, IRA or pension account should be in a Revocable Living Trust (“RLT”).  As you may recall, a RLT is a legal document created during your lifetime that allows you to leave your real and personal property to beneficiaries of your choice.  A RLT is very much like a Will with one BIG exception: there is no Probate with a RLT.   

The most common asset put into a RLT is real property.  By putting real estate into a RLT there is no probate and minimal time delay incurred in transferring assets to beneficiaries with a RLT because no court approval is required.     

The question is more complicated when it comes to having an estate plan that calls for the RLTs to be a beneficiary of retirement accounts.  The first question we ask is whether there is a strong estate planning reason to name a trust as a beneficiary, or is there a way to achieve the same planning goals without incurring the risks and complications of naming a trust?

Our first choice in drafting most estate plans will be for you to leave your retirement benefits i.e. your pension, 401K and IRA outright to your intended beneficiary.  In most cases, this will be your spouse.  However, what should you do if your spouse is not alive and you want to leave your benefits to minor children or to several beneficiaries?

If you want to leave retirement benefits to minor children or you want to leave to them to several people, these are compelling reasons why a RLT should be the beneficiary or a contingent beneficiary.   If you name a beneficiary who does not have capacity to receive the benefits i.e. a minor child, then a conservatorship will be established by the court at great expense to the minor child.

If you have retirement benefits and are considering making a RLT a beneficiary, you will need to check with your retirement benefit administrator regarding naming a RLT as your beneficiary.  Different companies have different rules.  Sometime they require an attorney drafted designation.  Also, it is critical that your beneficiary designation is correct and reflect your intentions.  Who you put on the designation is the person who gets the money.  They have no obligation to share with anyone else. 

If you are considering leaving retirement benefits in a RLT, the beneficiary of the trust must be a person or group of people.  You can’t use a trust to leave retirement benefits to a charity, your church or another trust or any other entity.  That is not to say that other assets of your trust cannot go to a charity or church or another entity, just not the retirement benefits. 

Today retirement benefits are very valuable.  Take the time to understand what your current estate plan for the benefits is and what other options are available to you and your family.   For most people, an Estate Plan including a RLT and all of the ancillary documents including a Power of Attorney and Healthcare Directive should not cost more than $2,000-2,500.  Most attorneys allow people to make payments over time for the work.  If you have separate property from a prior marriage,  business interests that need to be included or a taxable estate, it may be more, but then it is even more important that you properly plan for distribution of your assets in accordance with your wishes without the prying eyes of the public and court system. 

I see people every day for a FREE 30 minute consultation in Walnut Creek and Brentwood.

This article provides only general legal information, and not specific legal advice.  Information contained is not a substitute for a personal consultation with an attorney.  LAW OFFICE OF JOAN M. GRIMES, PHONE (925) 939-1680, 1600 S. MAIN STREET, SUITE 100, WALNUT CREEK, CA  94596;  191 SAND CREEK ROAD, SUITE 220, BRENTWOOD, CA  94513     © 2014 Joan Grimes 

Debt Forgiveness on Lines of Credit

The Loan Balance is Gone…. Really?

I have received many calls in the past month from borrowers who have received letters from their mortgage lenders stating that the lender is going to forgive the balance on their line of credit in the next 30 days if the borrower does not call to decline the offer.  Yes, you read that right.  No strings attached.  The balance on the loan will be gone.

So who is doing this?   So far, most of the letters have been coming from Bank of America and Chase.  However, given the requirements of the National Mortgage Settlement, I think we can expect to see the letters from all the Big Five i.e. Ally Financial, Inc. formerly GMAC Mortgage, Residential Capital, Bank of America,  f/k/a Countrywide Home Loans Servicing, Citigroup, Citibank, CitiMortgage, JPMorgan Chase and Wells Fargo Bank.

So, what is the catch?  The catch is that when the debt is forgiven, a 1099c is going to be sent to the borrower for the amount forgiven.  What this means is that amount forgiven is going to be considered income at your current tax rate unless one of the exceptions to the income recognition rule applies.

So what are the exceptions? 

#1- The borrower filed bankruptcy before the debt is forgiven.  The bankruptcy does not have to be finished, but it does have to be filed prior to the end of the 30 days.

#2- The borrower is insolvent.  What this means is that the borrowers does not have assets such as 401k/IRA/pension benefits or other assets.  Many a person has believed themselves to be insolvent only to be informed that those assets they cannot currently reach are still assets for determining solvency.   If you think you are insolvent, be sure to talk to your tax advisor within the 30 day period to confirm.

#3 The Debt being forgiven falls under business debt exception

#4 The Debt being forgiven falls under the farm debt exception.

#5 The Debt being forgiven was one of the original loans used to purchase the home.

#6 You fall under the short sale and mortgage forgiveness act which is still in effect until January 1, 2013 which provides that to the extent the money was used to purchase the property or make significant improvements to the property and it has been your home for the last 2 of 5 years, you do not owe taxes

In conclusion, if you receive one of these letters, I recommend you seek legal counsel immediately to determine whether this offer is in your best interest.  This is a complicated area of the law.  A real estate or bankruptcy attorney should be able to make to an analysis of your situation quickly which will allow you to decide if the debt forgiveness is in your best interest.

I see people for a FREE 30 minute consultation at my offices in Walnut Creek and Brentwood.

WE ARE A DEBT RELIEF AGENCY.  WE HELP PEOPLE FILE FOR BANKRUPTCY RELIEF UNDER THE BANKRUPTCY CODE.  THIS INFORMATION IS NOT PROVIDED AS LEGAL ADVICE AND SHOULD NOT BE RELIED UPON IN MAKING ANY DECISION REGARDING A VOLUNTARY DEFAULT, SHORT SALE, FORECLOSURE OR BANKRUPTCY.  THIS INFORMATION IS NOT A SUBSTITUTE FOR OBTAINING TAX & LEGAL ADVICE REGARDING AN INDIVIDUAL SITUATION.   (925) 323-7772.           

 © 2012 Joan Grimes

Top 10 Signs You Should See a Bankruptcy Attorney

These are difficult times and it is easy to ignore the signs of trouble when you are overwhelmed with work, spouses acting like children, children acting like teenagers and teenagers just being completely out of control.  So, to help you sort out the kind of trouble which warrants a visit to a bankruptcy attorney, here are my Top 10 signs you should see a Bankruptcy Attorney:

     10.  People are taking pictures of your house and it is not because they love your yard.

      9. You are contemplating taking money from your retirement account and you are not retired.

      8. You have taken money from your retirement account and you are not retired.

      7. You know all your creditors by their caller ID numbers.

      6. You cannot pay off your credit cards in full in the next 12 months and continue to eat.

      5. You go to get in your car and it is gone.

      4. You have run out of relatives willing to lend you money.

      3. Your wages are being garnished or your bank account has been levied.

      2. Your house is so far underwater that the sharks are circling and you do not live in a flood plain.

      DRUM ROLL PLEASE,

      1. You are actually contemplating moving in with your mother-in-law.

       If any of the above things are happening to you or have happened to you, it is time to see a bankruptcy attorney.  You did not make this economic meltdown, but you can make the CHOICE to stop letting it control your life.  The real estate speculation game is over for now. The banks won this round, but don’t let them continue to dictate your life.  Cut your losses now and leave the casino i.e. the house/car/motor home that is worth less than you owe on it.  Reclaim your financial future.  Save cash for your retirement.  It is much easier to buy food with cash than sheet rock.  There is not going to be any principal or long term payment reduction on home loans.  The banks are protected by this government and until that changes … (never), consumers must stop giving all the cards to the banks.  Cash is king.  If you don’t have the money to buy something outright, wait until you do.  The lenders have no problem doing what is in their best interest and you should not either.  I see people every day for a 30 minute FREE consultation at my offices in Walnut Creek, Antioch and Brentwood.   

WE ARE A DEBT RELIEF AGENCY. WE HELP PEOPLE FILE BANKRUPTCY RELIEF UNDER THE BANKRUPTCY CODE. THIS INFORMATION IS NOT PROVIDED AS LEGAL ADVICE AND SHOULD NOT BE RELIED UPON IN MAKING ANY DECISION REGARDING A  SHORT SALE OR FORECLOSURE. THIS INFORMATION IS NOT A SUBSTITUTE FOR OBTAINING TAX & LEGAL ADVICE REGARDING AN INDIVIDUAL SITUATION. GRIMESBKLAW.COM (925)323-7772

© 2011 Joan Grimes



Penny Wise, Pound Foolish - Filing Bankruptcy without a Bankruptcy Attorney

When a person is experiencing financial problems and knows a Bankruptcy must be filed, it is very tempting to consider filing without an attorney.   However, before you start down the road of filing on your own and opening up a GOLD MINE for the bankruptcy trustee and your creditors, consider the following:

1.  If you miss even one exemption for which you are entitled or the timing of bankruptcy filing is not correct, all the savings you made by filing on your own are GONE.  If you do not properly exempt assets, the bankruptcy trustee WILL take your assets and sell them for the benefit of creditors.  The Trustee is not there to help or educate you!  Their job is to maximize the recovery for creditors AFTER paying themselves.  Let me tell you that this is happening every day.  I can’t even begin to tell you the number of times I have seen trustees take money from bank accounts, tax refunds, jewelry and vehicles because the Debtors did not have representation.  

2.  If you omit property either intentionally or inadvertently, the trustee can take the omitted property and sell it for the benefit of creditors or can move for a denial of discharge.

3.  If you miss or don’t include debts, either intentionally or inadvertently, the debt may be deemed nondischargeable or the court may move for dismissal.

4.  If you don’t understand the Means Test, you may not qualify for bankruptcy or may end up filing the wrong type of bankruptcy case.

5.  If you have a business and your bankruptcy case is not filed properly, you may end up losing the business or assets of the business.

6.  If you are on title to bank accounts, personal property or real property with relatives, the trustee or creditors may attempt to take the property even if you claim to have only bare legal title versus an equitable interest in the property.  Do you understand the effect of inheritance after a bankruptcy filing?

7.  If you don’t understand real property law, you may end up filing an unnecessary bankruptcy or alternatively may increase your personal and/or tax liability by completing a short sale or foreclosure prior to the bankruptcy filing.

8.  If you don’t understand tax law and own real property or have significant amounts of debt, don’t even think about filing bankruptcy on your own especially if you have assets such pensions, IRA, 401k or other assets such as annuities.  You don’t want to trade bank and credit card collectors for the IRS or State Franchise Board.  The fact that you currently do not have equity in the property is irrelevant.

In conclusion, filing bankruptcy on your own is almost always a very bad idea and ends up costing more in the long run because of assets lost or other problems with the bankruptcy case.   The above is just a few of the issues which must be addressed prior the bankruptcy filing.  Bankruptcy is very complicated area of the law and is a mine field for the unwary.   Even attorney who are general practitioners will not generally file bankruptcy cases because of the complexities involved in the filings.  If you don’t have the money to file bankruptcy at this time, you should still seek legal counsel and discuss your options.  Most bankruptcy attorneys allow payment of fees over time.  Don’t be a Penny Wise and Pound Foolish.  I see people every day for FREE 30 minute consultations at my offices located in Walnut Creek, Antioch and Brentwood.

WE ARE A DEBT RELIEF AGENCY.  WE HELP PEOPLE FILE FOR BANKRUPTCY.  THIS INFORMATION IS NOT PROVIDED AS LEGAL ADVICE AND SHOULD NOT BE RELIED UPON IN   MAKING ANY DECISION REGARDING A VOLUNTARY DEFAULT, SHORT SALE, FORECLOSURE OR BANKRUPTCY.  THIS INFORMATION IS NOT A SUBSTITUTE FOR OBTAINING TAX & LEGAL ADVICE REGARDING AN INDIVIDUAL SITUATION. 

GRIMESBKLAW.COM  (925) 323-7772  © 2011 Joan Grimes

Advice From People Who Filed Bankruptcy

 I have been asking people who come into my office if they have any advice/regrets about their actions prior to filing bankruptcy.  Here is their advice:

1. Seek Legal Counsel.  Don’t wait to find out your options.  Almost every person said they wish they had come in sooner.  Many have said they would have done things differently had they known the law and available options.

2. Don’t borrow or take money from your 401k, IRA, Savings Account, Children’s Saving Account, Deferred Compensation to cure to the default.  So many people regret borrowing or taking a distribution from their retirement plan.  Unfortunately, many people don’t know that this money, if borrowed, must be repaid in full or it will be considered income and taxed accordingly.  In addition, this tax cannot be discharge in bankruptcy.  It is heart breaking to see people take money out of their retirement to stay current on the mortgage, to only lose the house at the later time, but are still responsible for tax liability of the distribution.  

3. Don’t borrow money from family or friends to stay current on mortgage or other bills.    Family and friends want/expect to be repaid irrespective of whether you file bankruptcy.   In the eyes of the bankruptcy code, your family and friends are just another lender and will not receive preferential treatment.  

4. Don’t juggle credit cards to pay mortgage.  Cash advances and balance transfers may cause problems in a bankruptcy.  In addition, depending on the type of real estate debt you have, a short sale or foreclosure may be possible without a bankruptcy.  However, if you run up your credit cards trying to keep the house, a bankruptcy may be evitable.

5.  Don’t leave house until property forecloses or short sale is complete.  Almost every person that has left their home prior to the foreclosure or short sale being completed regrets the decision.  Once you stop paying on the mortgage, your rent is “free” with the exception of paying the Homeowners Dues and keeping insurance on the property.  Further, since you are still responsible for the maintenance  of the property until the foreclosure or short sale, you might as well enjoy it and save some money.  No reason to pay rent any soon than necessary.

6.  Don’t let your cultural pride stand in the way of you making sound financial decisions.  There is nothing to be ashamed of.  You did not make this economic meltdown.  You are not responsible for the economic collapse facing the Bay Area.  The economy of your parents’ generation is not the same as today.   

7.  Don’t co-sign for anyone.  No one can promise the future.  So many clients regret co-signing for a friend or relative. Co-signing for cars, furniture, Time-Shares and homes seemed like a good idea, but times change and suddenly there is a default.  Worst of all, don’t co-sign on Student Loans.  The default  rate by students who have had a friend or family member co-sign is much higher and YOU CANNOT DISCHARGE CO-SIGNED STUDENT LOANS IN BANKRUPTCY!

If you do not have sufficient income to pay your bills as they come due and owing, you should seek legal counsel before withdrawing any monies from a retirement account, savings account or taking a loan against your home or car.  These are difficult times, but do not miss the help and protection provided by the Bankruptcy Code and California law by waiting too long.  Just because this ship is underwater does not mean that you should give up your life vests that you will need to keep you afloat!

Want to learn more, listen to Joan Grimes recent interview on the Bay Area Real Estate show on FOX NEWSRADIO 910 AM with Krista Mashore.  Joan reveals some of the regrets she hears from clients filing bankruptcy. 

WE ARE A DEBT RELIEF AGENCY.  WE HELP PEOPLE FILE BANKRUPTCY.  THIS INFORMATION IS NOT PROVIDED AS LEGAL ADVICE AND SHOULD NOT BE RELIED UPON IN MAKING ANY DECISION REGARDING A VOLUNTARY DEFAULT, SHORT SALE, FORECLOSURE OR BANKRUPTCY.  THIS INFORMATION IS NOT A SUBSTITUTE FOR OBTAINING TAX & LEGAL ADVICE REGARDING AN INDIVIDUAL SITUATION.              

© 2011 Joan Grimes

Consumer Stress Test - Call To Action

 Everywhere we turn there seems to be a “stress test”.  First, the stress test is performed by my cardiologist to make sure my arteries aren’t clogged.  Thankfully, they aren’t.  My doctor just says that I need to lose 20 pounds, get more exercise and I will hopefully live to be at least 80.  Then, there was the government’s “stress test” for banks.  The “too big to fail” group passed which was not surprising after Congress passed the Troubled Asset Relief Program (“TARP”),which allowed them to borrow money at 0% and then charge borrowers 5%+ for the same money.

So, I decided we need to have a “consumer stress test” since I plan to live to 80 years old and I am not “too big to fail.”  Let’s see if we, as consumers, pass the “consumer stress test”:

1. Do you have credit card debt?  If you do, this is not a good sign.  Credit card lenders are like drug dealers.  Drug dealers give away drugs to get kids hooked and credit card lenders give away money to get consumers hooked.  They will give you money until you stop paying the balance in full each month.  They know it is just a matter of time before you will stop paying off the balance and then it is all over. It is a win-win situation for them every time.  Stop using credit cards, pay off them immediately. “Doctor’s” first piece of advice:  If you can’t pay off the balance in full in the next 12 months, see an attorney for options.

2. Do you have a car loan?  If you do, this is not a good sign.  Cars are depreciating asset.  If you have a car loan with a payment of $400 per month, you need to make $800 per month to just make that payment of $400 because of state, federal, social security and other applicable taxes.  Is that car really worth it?  Probably not.  If you cannot pay off that car loan in the next 2 years, see an attorney for options available to you.  “Doctor’s” second piece of advice: next time you purchase a car, no car loan.  Save until you can buy without a loan.

3. Do you have home loans?  If you have home loans that exceed 2-2 ½ times your gross household income, this is not a good sign.  What we know is that having home loan debt that exceeds 2-2 ½ times your gross household income, makes you “house poor” meaning you are spending too much of your income on shelter. For example: if you make $50,000 a year, your home loan should not exceed $125,000.  If your home loan balances exceed 2-2 ½ times your gross household income, see an attorney for options available to you.

4. Are you putting at least 10% of your gross household into a 401k/IRA/savings each year?  If not, this is probably the worst of sign of all.  We will need money when we can no longer work and want to retire.  If your income has recently been reduced, you can also reduce the amount you put into your 401k or IRA, but don’t stop thinking about tomorrow.

If you don’t take care of your money, no one will.  Everywhere we turn, there is someone trying to get it.  If you did not pass the consumer stress test, seek legal counsel.  The government may not be willing to give us money or let us borrow at 0% interest like they did for the banks, but we do have the Bankruptcy Code which can give us a fresh start.  We must take the time to think about tomorrow.  It will be here sooner than we think.   

WE ARE A DEBT RELIEF AGENCY.  WE HELP PEOPLE FILE BANKRUPTCY.  THIS INFORMATION IS NOT PROVIDED AS LEGAL ADVICE AND SHOULD NOT BE RELIED UPON IN MAKING ANY DECISION REGARDING A VOLUNTARY DEFAULT, SHORT SALE, FORECLOSURE OR BANKRUPTCY.  THIS INFORMATION IS NOT A SUBSTITUTE FOR OBTAINING TAX & LEGAL ADVICE REGARDING AN INDIVIDUAL SITUATION.

Can’t Afford Your Real Property Taxes?

As the mortgage crisis enters its third year and unemployment rises above 10% in many areas of California, more and more people are unable to pay their property taxes.  If you are in default on your property taxes or considering a default, here is the law you should know.

First, property taxes are a secured claim against the real property.  They are not a personal debt and there is no criminal penalty if you cannot pay your property taxes.   If your home forecloses and there are delinquent property taxes at the time of the sale, it will not follow you.  Therefore, if you do not have the money to pay the taxes, do not borrow the money from a credit card or 401k account/ 401k loan to make the payment.  In the event the home is lost in a foreclosure and you borrowed the money, you will still be required to repay the credit card debt (even potentially in bankruptcy because taxes paid with a credit card may be  non-dischargeable) or through the 401k loan. 

Second, if you cannot pay your property taxes when due, the County cannot immediately foreclose on your property.  In fact, it is very rare for a county to foreclose on real property for non-payment.  In most places in California, real property must  remains in tax defaulted status for five or more years before it will become subject to the Tax Collector’s power of sale.

Third, if you cannot afford to pay your property taxes, you have several options.  A good option is to enter into an Installment Plan of Redemption which is a 5 year plan that allows a taxpayer to pay defaulted taxes in five installments.  However, prior to applying for an Installment Plan you should contact your mortgage lender to make sure they will allow the payment plan to pay taxes in default.  Sometimes, mortgage lender will automatically advance for the past due taxes and establish an impound account for past due taxes and as well as establishing an impound account for future taxes and insurance.  The negative consequence of a lender paying the taxes is that they usually require the past due taxes to be repaid over 1 year versus the 5 years allowed by the County.  However, the positive consequence is that the accrual of interest by the County is stopped and if you qualify for a loan modification, the past due taxes are in most instances paid through the modification.  Another option is to see if you qualify for tax payer assistance.  The common form of assistance is through the Property Tax Postponement for Senior, blind and disabled persons which allows qualified homeowners to postpone payment of all or a portion of the property tax due on their home.

Fourth, make sure your property is being taxed at the it’s current fair market value.  If you feel that your current assessed value is not the current market value, you may request a review by the County.  This process is commonly referred to as a Proposition 8 review.

In conclusion, there is no free lunch if you are late on your property taxes.  However, there are options available to you.   This is a complicated area of the law.  You are in the deep end of the pool.  Do not swim alone.  The buddy system is essential.  Seek a buddy in legal counsel prior to taking any action.  I see people every day for a FREE 30 minute consultation in my offices located in Walnut Creek, Antioch and Brentwood.

WE ARE A DEBT RELIEF AGENCY.  WE HELP PEOPLE FILE FOR BANKRUPTCY.  THIS INFORMATION IS NOT PROVIDED AS LEGAL ADVICE AND SHOULD NOT BE RELIED UPON IN   MAKING ANY DECISION REGARDING A VOLUNTARY DEFAULT, SHORT SALE, FORECLOSURE OR BANKRUPTCY.  THIS INFORMATION IS NOT A SUBSTITUTE FOR OBTAINING TAX & LEGAL ADVICE REGARDING AN INDIVIDUAL SITUATION. 

Should You File for Bankruptcy?

A common question people ask me is whether they should file for bankruptcy. They don’t want to file, but they also know that they cannot continue with the status quo. Here is what I ask them:

1. Can you pay your bills as they come due and owing?

2. Can you pay off your credit card bills in full in the next 12 months?

3. If you own a house, do you have a fixed rate mortgage that you can payoff by the time you retire? Is your house worth what you owe against it?

If you have answered “no” to any of these questions, you should be considering whether a fresh start through bankruptcy maybe the right decision for you.

A fresh start has been provided to the Banks, the Investment Companies, and the Insurance Companies and a fresh start is available to consumers. Most home loan made between 2001-2007 could not be paid off on a person income. More than anyone, the banks knew that a person can only pay off in home loan debt of 2-21/2 times their gross household income in this lifetime and save for retirement and raise a child or two.

A fresh start for a consumer is usually a Chapter 7 bankruptcy. A Chapter 7 is a straight bankruptcy also known as a liquidation case. In a Chapter 7 case, all assets and liabilities are included and the Chapter 7 Trustee will have the right to liquidate non-exempt assets for the benefit of creditors. In exchange for including all assets and liabilities, an individual’s promise to pay on most debts are forgiven through a discharge.

In most cases, there are no assets available to creditors because all of the assets are exempt or encumbered by liens to the full extent of their value. Exempt assets that the Chapter 7 Trustee cannot reach include 401k, IRA, Annuity, retirement plan, equity in a car up to $3,525, most household goods and furnishing, life insurance, most personal injury actions, and then $23,250 in other assets such as motorcycles, boats, RV or additional equity in cars or other items.

Most people who are having problems paying their bills qualify for Chapter 7 Bankruptcy either because their income is low or because their mortgage payments and other secured loans such as car loans are too high in relation to their income. However, a person should not delay in seeking legal advice. The loss of a home prior to a bankruptcy filing either through a short sale or foreclosure may make an individual’s income too high for a Chapter 7 and the only option will be Chapter 13 repayment plan which will last between 3-5 years. In addition, there may be personal liability and tax consequences which could have been eliminated in a bankruptcy.

In conclusion, if you are having financial problems, seek legal counsel. You did not make this real estate and credit card meltdown. There are serious personal liability and tax consequence of a short sale and foreclosure. Make sure you understand your legal rights prior to undertaking either a short sale or allowing your property to be foreclosed. Do not lose sleep and your sanity worrying about financial problems. Help is available to you just like it was to the Bank, Investment Companies and the Insurance Companies.

WE ARE A DEBT RELIEF AGENCY. WE HELP PEOPLE FILE BANKRUPTCY RELIEF UNDER THE BANKRUPTCY CODE. THIS INFORMATION IS NOT PROVIDED AS LEGAL ADVICE AND SHOULD NOT BE RELIED UPON IN MAKING ANY DECISION REGARDING A VOLUNTARY DEFAULT, SHORT SALE, FORECLOSURE OR BANKRUPTCY. THIS INFORMATION IS NOT A SUBSTITUTE FOR OBTAINING TAX & LEGAL ADVICE REGARDING AN INDIVIDUAL SITUATION. © 2010

Joan M. Grimes. Grimesbklaw.com

If Your Ship is Sinking, Don’t Give Away Your Life Vest!

One of the saddest things is when a person comes into my office explaining that they have waited to come in until they have used up all their savings, retirement funds, equity in their home and/or have gotten a loan on their car just to keep paying their credit cards and other debts.  This just breaks my heart because it was completely unnecessary.

The Bankruptcy Code does not want or encourage people to wait until they have used up all of their assets to file bankruptcy.   In fact, the Bankruptcy Code and California law discourages these actions by specifically protecting certain assets in a bankruptcy case from the reach of creditors.  So what  are some of the assets which are generally protected and what actions should you be taking to protect these assets?

Retirement Accounts- All private retirement plans and profit sharing plans are exempt.   Also, exempt are IRAs, IRA rollovers, Roth IRA and Keogh plans held by self employed individuals to the extent necessary for the support.   Therefore, you should not be using retirement accounts to pay credit cards, bringing home loan payments current on a house that is underwater or other bills which could be discharged in a bankruptcy.  Every withdrawal from a retirement account will be taxed on both federal and state levels as well as incurring the 10% penalty for early withdrawal unless it falls under an exception for early withdrawals.  If you are in your 30’s-40’s, a withdrawal of $1,000 will amount to a loss of $10,000 in retirement income.  If you are in your 20’s, a withdrawal of $1,000 will amount to a loss of $20,000 in retirement income.  The withdrawal of even smallest amount will be a huge reduction in retirement income later.

Homestead Exemption- The California homestead exemption applies to your principal “dwelling” on the date the bankruptcy petition is filed.  The minimum homestead exemption in California effective January 1, 2010 is $75,000.  The exemption is increased to $100,000 if the you or your spouse reside in the homestead or at least other one member of the family resides in the residence and does not own an interest in the residence.  The homestead exemption is increased to $175,000 if you or your spouse meets the minimum age of 65, is disabled or meet the “low income” qualifications’.  Therefore, if you still have equity in your home, do not use it to pay dischargeable debt such as credit card or personal loans.

Personal Property, Cars and Jewelry-   A person can generally exempt all household furnishing and goods, wearing apparel, appliances, books, animals, crops or musical instrument held primarily for personal, family or household use as long as any individual items could not be sold at a garage sale for more than $525.00.  In addition, a person can have  equity in a car and certain amounts of jewelry depending on the exemptions used in the Bankruptcy case.  Therefore, no loans should be taken out on a vehicle which is paid off.

Wildcard Exemption-  If the homestead exemption is not used as discussed above, a person can have in addition to the car, jewelry and household goods and furnishing exemptions, retirement accounts and the other exemptions provided under California law, a person can have up to $23,250 in cash and other assets at the time of the bankruptcy petition which will be exempt.  That means there is no reason to sell the RV, boat or use up your savings unless that is really want you want to do so.  However, if you are not going to be paying your credit card or other installment debt, you should make sure that you are not putting money in a bank or credit union where you have debt.  Many banks and credit union have agreements that allow set-offs if a loan is in default from other checking or savings accounts.

Personal Injury and Workers Compensation Awards-  Personal injury settlements are generally exempt under “lost compensation” and future earning awards are exempt to the extent reasonably necessary for support.  In addition, Workers Compensation Awards are exempt.

Life Insurance-  Term Life Insurance is generally exempt and Universal or Whole Life up to a cash value of $11,800.  Therefore, term life/whole life insurance should not be cancelled since it is much more expensive to obtain as you get older.

The purpose of the Bankruptcy Code is to provide people with a fresh start.  A fresh start does not mean empty cupboards, empty retirement accounts, empty savings accounts or no equity in a car or home.  We are all living longer and we will need food in our cupboards, money in our retirement accounts and a car that is paid off. 

If you do not have sufficient income to pay your bills as they come due and owing, you should seek legal counsel before withdrawing any monies from a retirement account, savings account or taking a loan against your home or car.  These are difficult times, but do not miss the help and protection provided by the Bankruptcy Code and California law by waiting too long.   Just because this ship is underwater does not mean that you should give up your life vests that you will need to keep you afloat!  

THIS INFORMATION IS NOT PROVIDED AS LEGAL ADVICE AND SHOULD NOT BE RELIED UPON IN MAKING ANY DECISION REGARDING A VOLUNTARY DEFAULT, SHORT SALE, FORECLOSURE OR BANKRUPTCY.  THIS INFORMATION IS NOT A SUBSTITUTE FOR OBTAINING TAX & LEGAL ADVICE REGARDING AN INDIVIDUAL SITUATION.              

© 2010 Joan Grimes