MA Law Blog

Children's Bank Accounts and 529 Savings Plans in Bankruptcy

      Debtors filing Massachusetts Chapter 7 and Chapter 13 bankruptcy cases are frequently concerned about their children's bank accounts and 529 college education savings plans. The question is whether these assets must be listed in the parent's bankruptcy filing.

      For bank accounts, it depends on how the bank account was opened. If the bank account has only the debtor's name on it there may be an issue as it would appear such an account is the debtor's and not the child's. It can be argued that account is held in trust for the benefit of the child, but the debtor will have to document and prove the monies are truly the child's. An account set up under the Uniform Gift to Minors Act will mean the monies will not be part of the parent's bankruptcy filing.

      529 Education Accounts are not considered the property of the child. They belong to the individual who opened the account and is named on it. Notwithstanding, the entire balance may not be an asset of the bankruptcy estate. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 excludes from the bankruptcy estate funds contributed to a 529 savings account more than 720 days before filing the bankruptcy petition. Contributions made between 365 and 720 days before the bankruptcy filing are limited to an exclusion amount of $5,000. Amounts contributed to a 529 plan within 365 days before the bankruptcy is filed are not excluded from the debtor's bankruptcy estate. In each instance, the amount considered is the contribution and not the account balance.

      Finally, while anyone can contribute on behalf of a designated beneficiary, only amounts contributed to the accounts of a child, stepchild, grandchild, or step-grandchild of the debtor for the taxable year for which funds were placed in such account are excludable as described above.

Bankruptcy and After Foreclosure

      When a debtor files a Massachusetts Chapter 7 bankruptcy there is an automatic stay that stops most collection actions, including foreclosure and eviction proceedings. Notwithstanding, the bankruptcy will protect the debtor for only a short time. Holders of mortgages that are delinquent may file motions for relief from the stay for the purpose of foreclosing, and for permission to evict the owner after foreclosure. If such a motion is allowed, Massachusetts state law is followed to complete the foreclosure sale. This can take months. After the foreclosure auction, the holder of the mortgage may have ownership, but it must acquire possession via a summary process action, otherwise known as an eviction. This can lead to further delays in the lender recovering possession. To save time, the lender will often negotiate with the former property owner. A former Chapter 7 debtor-client who experienced foreclosure was recently offered $4,000 to move out and allow the bank to have immediate possession.

　

　

　

　

　

To Buy or Not to Buy Owner's Title Insurance?: That is the Question!

 

      I'm often asked whether a buyer of Massachusetts real estate should spend the money to purchase owner's title insurance on their new home. This is a type of insurance policy protecting a homeowner when problems arise regarding their rights of ownership in their real estate. My response is the answer often lies in how the property owner generally manages risk, but considering the purchase of real estate is often the greatest investment they've made to date, it is a wise purchase.

      In the past few years, I've been able to assist homeowners to access their owner's title insurance coverage to remedy problems with undischarged, prior owner mortgages still on their title. The coverage allowed sales of homes to proceed without delay while the problems were later fixed. Another client was unable to tear down a small home existing on their lot to build a bigger house because an easement ran through the width of their property which prevented rebuilding a larger home. That owner was paid over $45,000 for the loss in value he suffered. Finally, another client tried to build a new home on his vacant lot, only to be told by his bank's lawyer that a probate had once been done in the wrong procedure and the bank wouldn't continue with the loan until the correct procedure was corrected. I was able to do the correct probate and his owner's title coverage payed for the legal fees and costs.

      Given the substantial value of the real estate investment and the low, one time, premium I believe Owner's Title Insurance Coverage is a good value.

I Surrender!

      When a debtor files a Massachusetts Chapter 7 bankruptcy case or Chapter 13 bankruptcy case their intention as to property must be stated. If the debtor does not wish to attempt to keep property an intention to surrender the property is stated.

      If a debtor states an intention to surrender, the property does not automatically transfer to a secured creditor. To obtain title, a secured creditor must obtain relief from the bankruptcy stay of collection proceedings and then follow state law to obtain title to the present owner's interest in the property.

      I advise all of my clients that ownership translates to liability for injuries sustained on the property. A bankruptcy filing will protect a debtor for such claims existing before the filing, but not those arising after the filing. Therefore, it is imperative to keep the property insured until legal title transfers.

　

　

Showtime

I want to give the subsribers to my blog advanced notice that William DiAntonio of Dollarbill911 will partcipate in the radio show "Money Matters with Scottie McCall" to be broadcast on WBNW AM 1120, WESO 970 and WPLM AM 1390, Friday, January 29, 2010 at 5:00PM. Bill will discuss elimination and control of debt, credit counselling and bankruptcy. Stay tuned for more information shortly.

Myths In The Practice of Bankruptcy Law

Myth 1 

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) eliminated the right to file chapter 7 bankruptcy which is the discharge of debt without repayment while retaining assets.

False, False, False. I file as many chapter 7 cases now as I did prior to BAPCPA.

BAPCPA did increase the time involvement of client, attorney and trustee. The cost of filing doubled.

Myth 2

You can't file chapter 7 bankruptcy if you have real estate, or a large value in personal property.

False. Property is a consideration in determining whether one can file chapter 7 or must file chapter 13. The consideration is the property value net of debt and whether in can be protected by available exemptions.

Myth 3

You can't have retirement assets.

False. You can have $1,000,000 in qualified retirement plan assets. One debtor I filed had $195,000.00. He kept it all. Like many debtors he borrowed against the account. He'll have to pay that back as originally contemplated. Other people cash their qualified retirement accounts to stave off bankruptcy. Later, they file anyway and no longer have that asset they could have saved.

Myth 4

You can't get a discharge for gambling debt.

False. One debtor I filed a Foxwoods debt of over $10,000 that will be discharged. A different outcome may take place in other states like Nevada.

Myth 5

If you make a lot of money, say $100,000 you can't file chapter 7 bankruptcy.

False. I'‘ve filed chapter 7 cases for single debtors making over $120,000 per year.

Myth 6

Once the bank starts foreclosure the real estate is lost.

False. First, filing a bankruptcy case will stay all collection matters. Chapter 13 plans allow for the debtor to come current by paying the arrearage over the life of the plan. A bankruptcy filing can stop a foreclosure up to the moment a Memorandum of Sale is signed.

Myth 7

Gamblers who suffer substantial losses can't file bankruptcy.

False. One debtor I filed had over $60,000 in losses the year before filing. It's important to disclose the losses.

Myth 8

Income you are presently earning will determine if you can file chapter 7 bankruptcy.

False. While "current monthly income" (CMI) is used to determine if one can file, that income is defined as income received and derived in the six months prior to the month of filing. This can make for bizarre results if the debtor was unemployed for a portion of that time and now has a well paying job (debtor makes out), or if the debtor had a well paying job for most of the time and is now unemployed (debtor is in a bad position).

Myth 9

A debtor can't remove a mortgage or judicial lien from their primary residence.

False. I've filed chapter 13 plans stripping a 2^nd and 3^rd mortgages. The key is their must not be one dollar of security in the mortgages being stripped.

Judicial liens are dissolved by motion in bankruptcy court when they impinge on the debtor's exempt interest. Recording of the allowed motion in the registry of deeds is required.

Bad Things Happen to Good People

Last week I met an attorney I had been introduced to for lunch. I knew little about his Massachusetts personal injury practice and wanted to learn more. I hoped he wanted to learn about my diverse law practice. During lunch he noted that the real estate market is rather slow and my Massachusetts real estate law practice must be off. I acknowledged that was true for the real estate practice, but that in these difficult economic times my Massachusetts bankruptcy law and Massachusetts divorce law practices are busy.

Often, domestic discord rises as money pressures increase. This can be an even larger problem if one spouse has lost employment and the other feels they are unfairly carrying the entire burden of supporting the family. Finance issues are often at the heart of a divorce case. The personal injury attorney acknowledged how bad times can lead to an increase in the divorce rate, but then continued on to say that bad times shouldn't necessarily lead to an increase in bankruptcy filings. I was absolutely flabbergasted and asked how he could say that. He explained that people should live frugally as he had growing up. He said his family was careful about money in the fear that someday there might not be any, and that staying in financial control meant there would never be a bankruptcy filing. He then commented that bankruptcy was for those people who were irresponsible in managing their debt by allowing credit cards to support extravagant life styles. I was incredulous.

I explained to my colleague that the bankruptcy clients I had helped came to me down many different paths, and that rarely was that path the irresponsibility of living extravagant lives off of credit cards. I was compelled to tell him about the elderly couple from Orange, MA who were forced into bankruptcy when the gentleman became terminally ill, there was no medical insurance and there were plenty of medical bills. Then, I thought of the hardworking mill worker and realtor who went through a divorce and now had their same respective incomes but two households to support. The debt became overwhelming and they filed Chapter 7 bankruptcy. I also told him of the couple who came to Framingham, MA from Brazil seeking the American Dream. Both husband and wife worked several jobs and they bought a home. They were proud of their accomplishment and that they were living the dream. They had trusted an unscrupulous lender to take care of placing their mortgage. The lender had given them two loans, both interest-only with low initial rates and payments. These loans would adjust in a year in rate and payment, but by then they were told there would be a refinance of the mortgages to a fixed rate loan. When the couple balked, the lender assured them "we do this every day, trust us, it works." With the declining market there was no refinance of the mortgage, only an inability to pay increased mortgage payments, inevitable foreclosure and the need to seek debt relief by filing bankruptcy. Finally, I told him of the newly graduated college student. She had received very little aid for her school tuition and expenses, other than many student loans. Her parents took the view that they paid for their education and she needed to pay for hers. Despite a new, good paying job she found it difficult to pay the large student loan payment and pay her living expenses. She started to supplement her budget by paying for food and essentials with credit cards. Soon it was to late to turn back, and Chapter 7 bankruptcy was her only option.

After I had finished recounting these sad stories, my colleague acknowledged that bankruptcy was there to help good people who had bad things happen to them. I told him that I was glad he could see that. I asked him about his parents, who instilled his value for fiscal responsibility. He told me they lived in Massachusetts and were retired living on social security. I expressed my best wishes for them. I didn't want to tell him about the heartache I foresee for our senior citizens and others on fixed incomes this winter when the fill-up of an oil tank is likely to cost $1,250 and the heating season at least $5,000.

How to Ruin a Good Bankruptcy Case

Over the past year, I've encountered a good number of clients who had bankruptcy cases that would have had no issues, until they decided to unilaterally take financial action without the advice and consent of a Massachusetts bankruptcy attorney. In taking their unilateral action they often badly damaged or substantially delayed their potential Chapter 7 or Chapter 13 bankruptcy filing. I want to describe some of these cases in this post with the hope that future clients will not make the same mistakes.

When an individual is experiencing debt problems they often transfer assets from their name to a relative. They mistakenly believe they are removing the asset from the reach of creditors. I've had clients who deeded their interests in real estate, or transferred their motor vehicle title to relatives without payment of fair market value being received for the transfers. These transfers must be disclosed on the bankruptcy petition and the trustee can seek return of the property to the bankruptcy estate. Never make these transfers prior to filing a bankruptcy case.

Similarly, many clients have struggled with their budget and have borrowed money from family members. The payments to family members whether for loans or gifts made in the last year must be disclosed in the bankruptcy filing. The Trustee can pursue reimbursement of these monies. Plan accordingly when timing your bankruptcy filing.

Sometimes potential clients have taken money from their 401(k) and other retirement assets to live on, and pay unsecured creditors who would have been discharged. They are postponing a filing. This disbursement usually does not create a problem in filing the case (although it might). Primarily, it is unfortunate that the retirement account money could have been protected and retained by the client if the bankruptcy had been filed prior to the distribution. The funds lost could have been saved.

Never run debt, including credit cards up immediately prior to filing. When you borrow money, even by buying with a credit card, and don't intend to pay it back, that is fraud. That type of debt may not end up being discharged. Certainly, luxury items worth more than $500 purchased 90 days prior to filing and cash advances of $750 or more taken 70 days before filing are presumed not dischargeable.

Some clients have payed off secured debt believing that they are improving their monthly budget. Secured debt may have a positive impact on the Means Test being passed and the client being able to file a Chapter 7 case. Also, by paying off secured debt the client might increase equity in the asset beyond the amount which can be protected. Before paying of secured debt items consult a Massachusetts bankruptcy attorney.

Finally, don't transfer balances from one credit card to another. This may result in a situation where some of the credit card debt is not discharged in bankruptcy

For people experiencing difficulties with debt and who might need to seek debt relief, it's always wise the seek a bankruptcy consultation with an attorney before taking action with your financial affairs on your own.

How to Pay for Bankruptcy When You are Broke

A client visited my office yesterday to discuss filing a MA bankruptcy case. He had no savings and very little money in his checking account. The client had a 401k with over $25,000. He had numerous credit card bills with balances totaling over $40,000 with regular monthly payments over$1,000. He had a wife and child and income of less than $50,000. This client was a perfect example of someone who should file Chapter 7 bankruptcy. His concern was how he could pay me to file the case. I had a few suggestions.

The obvious answer is to stop paying the credit cards entirely and take any saved money to apply to paying the bankruptcy attorney. In my client's case, we looked at his credit card situation and discussed each obligation separately. I was able to advise him he could stop paying all of them immediately without harming his Massachusetts bankruptcy case.

Another option often open to people is their income tax refunds, and now their stimulus checks. If these payments haven't been received they can be targeted for use in paying for the bankruptcy filing.

Never take money from a credit card to pay for the bankruptcy. And no, you can't charge the bankruptcy! If you have supportive family or friends they can be a source of funds.

I rarely advocate taking money from retirement accounts, but it may be appropriate to do so only to file a bankruptcy case, especially where the filing is needed to stop a foreclosure on a home. This source of funds should be a matter of last resort.

In any event, always look at the big picture - what little you are paying to obtain such a huge debt relief.

You've Been Certified!

Purchasers of Massachusetts real estate which is improved by a one to four family home they will occupy and which is financed with a purchase money mortgage are entitled to a Certification of the real estate title by the lender's attorney. Massachusetts General Laws, Chapter 93, Section 70 requires the lender's attorney to examine the property title records for a period of fifty years. The Massachusetts real estate attorney must then provide the purchaser with a Certification that the purchaser holds "good and sufficient record title to the mortgaged premises free from all encumbrances" except only those matters which are listed in the Certification. Any such exception must be specifically enumerated. Broad and general exceptions, such as "all easements of record" are not acceptable. The MA real estate lawyer must also make a certification to the lender that its mortgage is a "good and sufficient record first mortgage" to the property.

If you have a real estate title problem which surfaces after you've closed, you may have recourse against the attorney who certified your title. The certifying attorney remains liable to the purchaser in the amount paid for the property as long as they own the property. The attorney remains liable to the mortgage holder in the original amount of the mortgage for the life of the loan. The Certification provides buyers and lenders with a remedy against a negligent attorney.

Of course, attorneys retire, become disabled, die, or if lucky, retire to a tropical island. If that happens, your Certification may not be worth much. Always strongly consider the purchase of an Owner's Title Insurance Policy. The cost is reasonably discounted because the lender is always requiring a Lender's Policy that the buyer is paying for, and insurers will allow for a reduced rate to the buyer. After all, the purchase is likely to be your most major investment, and the insurance premium is a one time charge.