Can a Debtor Exempt an Inherited IRA?

A person who has an Individual Retirement Account (IRA) may designate a beneficiary to receive the balance in the account if the person dies before the account is depleted. If the person dies before the funds are depleted, the beneficiary is now the owner of the account. Under Maryland exemption laws, a debtor, filing bankruptcy may exempt all the funds in his or her own IRA. The question arises whether a person, other than a surviving spouse, who inherits an IRA may also exempt all the funds in the inherited IRA.

The surviving spouse has the right to transfer the IRA to his or her own name. This is commonly referred to as a “rollover distribution.” Once this is done, the spouse’s IRA is exempt under Mayland law.

A nonspousal beneficiary does not have this option. Instead, the nonspousal beneficiary must keep the account in the deceased name and must take distribution of all the funds within either 5 years, or if an election is made, over the beneficiary’s life time. Neither type of beneficiary may make an contributions to the IRA, but both may withdraw the funds in the account without penalty even if he or she has not reached retirement age.

Courts split on whether the nonspousal beneficiary may exempt the IRA in a bankruptcy case. In one case, In re Nessa, 426 B.R. 312 (8th Cir. BAP 2010), the court allowed the exemption. While in the case of In re Chilton, 426 B.R. 612 (Bankr. E.D. Tex 2010), the court denied the exemption. However, in Maryland, the law specifically provides that:

“In addition to the exemptions provided..... any money or other assets
payable to a particiapant or beneficiary from, or any interest of any
participant or beneficiary in, a retirement plan qualfied under §401(a),
§403(a), §403(b), §408, .... of the United States Internal Revenue Code
...., shall be exempt from any and all claims of the creditors of the
beneficiary or participant...” (Emphasis supplied)

Accordingly, under Maryland exemption statute, the beneficiaries of an IRA, even a nonspousal beneficiary, should be able to exempt the IRA in their bankruptcy case.

Laura J. Margulies is a principal in the firm of Laura Margulies & Associates, LLC. Our web site is located at: www.law-margulies.com. We represent consumers in bankruptcy and litigation matters in Maryland and the District of Columbia.

Debtor’s Obligations After Property Is Surrendered

When a debtor files for bankruptcy, he or she may want to surrender certain property that is subject to a lien back to the lender. For example, the debtor may want to surrender a car that is only worth $2,000 but has a lien of $10,000 back to the car lender. Another common example is when the debtor does not want to keep a house worth $100,000 that has mortgage liens that total more than $200,000. In a Chapter 7 case, the debtor indicates his or her intention to surrender in a separate form entitled “Statement of Intent.” In a Chapter 13 case, the debtor indicates his or her intention in the Chapter 13 Plan. The Chapter 13 trustee may also require that the debtor provide him or her with evidence of the surrender of the collateral.

Unfortunately, even after the lender is notified of the debtor’s intent to surrender the property, the lender in these circumstances is generally not obligated to repossess or foreclose on their collateral. The personal obligation of the debtor for the debt is discharged, but until the title changes or the car is repossessed, the debtor is still the owner of the property. In the case of a car, if the car is not picked up by the lender then as long as there are tags on the car, the debtor must keep the car insured. In the case of a house, the debtor should still maintain hazard insurance until the property is sold or at least until the date of a foreclosure sale. The debtor will also be required to maintain the property, such as cutting the grass, until it is sold. In addition, if the property is subject to condominium or homeowner association fees, after the filing of the bankruptcy case the debtor will need to pay these fees on a monthly basis until the property is sold.

Laura J. Margulies is a principal in the firm of Laura Margulies & Associates, LLC. Our web site is located at: www.law-margulies.com. We represent consumers in bankruptcy and litigation matters in Maryland and the District of Columbia.

Condominium and Homeowners Association Fees in Bankruptcy

Many of my clients who own a condominium, or live in a neighborhood that is subject to a homeowners association, are surprised to learn that after they file bankruptcy they still have an obligation to pay fees to the condominium or homeowners association. Filing bankruptcy will discharge the condominium or homeowners association fees or dues that had accrued before the case was filed, but will not discharge the obligation that becomes due after they file. This is due to an exception in the Bankruptcy Code Section 523(a)(16) which provides that a discharge will not include fees or assessments that become due and payable after the case is filed. The debtor will continue to be liable for these fees after the filing of the bankruptcy case until the debtor no longer has any legal interest in the property.

Laura J. Margulies is a principal in the firm of Laura Margulies & Associates, LLC. Our web site is located at: www.law-margulies.com. We represent consumers in bankruptcy and litigation matters in Maryland and the District of Columbia.

ISSUES REGARDING FUNDS IN A BANK ACCOUNT PRIOR TO FILING BANKRUPTCY

Under the 1995 Strumpf decision, (Citizen Bank of Maryland v. Strumpft, 516 U.S. 16) the Supreme Court ruled that a bank may freeze any money that is in a debtor’s account at the time it learns of the debtor’s bankruptcy case, if the debtor owes the bank money. This would result in the debtor not having access to those funds. The bank may then file a motion with the bankruptcy court for permission to sefoff the funds in the account with the amount the debtor owes the bank. The Supreme Court held that this freeze did not violate the automatic stay provisions of the Bankruptcy Code, which normally prohibit creditors from taking any actions to collect its debt. As a result of this ruling, I have always advised my clients to remove any funds they have in a bank before filing the case if they owe the bank money.

Wells Fargo Bank took this one step further. It believed it had the right to freeze money in a debtor’s bank account even if the debtor does not owe it money. In re Mwangi, 432 B.R. 812 (9th Cir. B.A.P. 2010); Calvin v. Wells Fargo Bank NA, 329 B.R. 589 (2005). Its national policy provided that if the debtor had more than $5,000 in an account with Wells Fargo, it would put an administrative hold on the account once it found out about the debtor’s bankruptcy. It would then send the debtor a letter notifying him or her about the freeze. Another letter would be sent to the trustee appointed in the case notifying the trustee about the account and asking the trustee what it should do with the frozen funds. Even if the debtor had exempted the funds on his bankruptcy schedules, he would have no access to the funds until the trustee to informed Wells Fargo to release the funds. This could result in a wait of more than 30 days. The Mwangi decision will hopefully put an end to this practice. The 9th Circuit ruled that because the bank was not attempting to protect setoff rights, the “exception” to turnover of funds in a deposit account recognized by the Supreme Court in Strumpf did not apply in this case. The funds in the debtor’s accounts, even those claimed as exempt, were property of the estate and therefore the debtors had standing to pursue sanctions for bank's stay violation. Finally it held that by placing a hold on the account funds, the bank exercised control over property of the estate in violation of the automatic stay.

Now that Wells Fargo has acquired Wachovia, more people would have been subject to this freeze. Until it is clear that Wells Fargo will no longer put their account holders’ funds on hold upon learning of their bankruptcy cases, I would advise potential bankruptcy clients not to leave funds in their Wells Fargo account.

Laura J. Margulies is a principal in the firm of Laura Margulies & Associates, LLC. Our web site is located at: www.law-margulies.com. We represent consumers in bankruptcy and litigation matters in Maryland and the District of Columbia.

Special Treatment of Utility Creditors in Bankruptcy

When a debtor files for bankruptcy, one of the outstanding debts may be past due payments owed to utility companies, such as PEPCO or Washington Gas, for electric and gas service. The past due amounts may be discharged, however, in order to continue service, the debtor may be required to pay a new security deposit.

The Bankruptcy Code Section 366 provides that the debtor must provide “adequate assurance of payment” to a utility company within 20 days of the filing of the petition or the utility company may discontinue to provide the service. However, the utility company must still comply with state regulations regarding the turn off of the service.

Generally, what constitutes “adequate assurance of payment” is the payment of an additional security deposit to the utility company by the debtor. The deposit must be reasonable and the Code permits the debtor to challenge the reasonableness of the security deposit, Section 366(b), if he or she believes the amount requested by the utility company is not reasonable. The Bankruptcy Court will then schedule a hearing on the issue and make a determination as to a reasonable amount.

If the debtor was current on his or her utility bills before the case was filed, the court may look at his or her prior pay history to see if they were paid late, or whether the debtor was relying on credit cards to make the payments, to determine if the amount requested by the utility company is reasonable.

Once the debtor pays the security deposit, the utility company must continue or restart the service (if it was terminated prior to filing). If the debtor falls behind on the payments after filing, the utility company does not need to file a motion with the bankruptcy court to terminate the service, it can be automatically terminated (assuming the company complies with the state regulations on termination). This is true for case filed under Chapter 7 and Chapter 13.

In my experience, the utility company will send my office a letter asking that my client, the debtor in a bankruptcy case, pay it a certain sum for a security deposit. I forward the letter to my client and recommend that the person pay the bill. The amount requested by these companies has always been a reasonable sum, so that I have not had to file a motion with the court asking for a reduction.

Laura J. Margulies is a principal in the firm of Laura Margulies & Associates, LLC. Our web site is located at: www.law-margulies.com. We represent consumers in bankruptcy and litigation matters in Maryland and the District of Columbia.

New Maryland Exemption

Maryland has enacted a new exemption law. This law adds a homestead exemption of $20,200.00 per household. This new law is part of Maryland Courts and Judicial Proceedings Section 11-504 (f)(1)(I). The exemption applies to the homeowner and can only be claimed once in 8 years. The exemption claimed by one homeowner, cannot be claimed by joint owner of the property for another 8 years. The exemption is tied to the Bankruptcy Code Section 522(D)(1), and therefore the amount of the exemption is subject to change every 3 years. This exemption is in addition to the other $12,000 of exemptions listed in Section 11-504.

This homestead exemption is good news for homeowners in Maryland. It means that if they have $20,200 in equity, they are able to keep their house even if they file a Chapter 7 bankruptcy case. The Chapter 7 trustee will not be able to sell the house for the benefit of their creditors unless there is more than $20,2000 in equity. This law also will apply to judgment creditors of the homeowner, they will not want to foreclose on the property unless the sale price will be sufficient to pay off the current liens and credit the homeowner with $20,2000.

This law was enacted to help homeowners who have lived in the property for a substantial period of time and have built up some equity in the property. It will protect them from losing their homes due to financial circumstances beyond their control, such as unexpected medical bills.

Laura J. Margulies is a principal in the firm of Laura Margulies & Associates, LLC. Our web site is located at: www.law-margulies.com. We represent consumers in bankruptcy and litigation matters in Maryland and the District of Columbia.

How Much Will My Chapter 13 Payment Be?

One of the most common questions asked, and the most important to many who file Chapter 13 bankruptcy is, "how much will the payment be?". The answer is not as simple as it would seem. Under the Bankruptcy Code, a debtor must devote his or her projected "disposable income" over the three or five year payment plan. In order to make this determination, the Court looks to a calculation based on the debtor's household's income and expenses. First, a debtor lists all of his or her household's income, based on all income sources, including wages, investment income, pension income, rent, etc. Next, the debtor lists all of his or her reasonable expenses, including food, mortgage payments or rent, gas, electricity, insurance, and other expenses. These expenses must be reasonable and verifiable. Many expenses, such as luxury vehicles, private school, and savings contributions must be cut. Once these expenses are subtracted from the income, the remaining money is dedicated to the Chapter 13 Plan. The Court may also look to a complicated "means test" that is filed by the debtor, to determine the amount a debtor must pay.

If a debtor files Chapter 13 to pay arrears on secured debts, the full arrearage must be paid back to the lender, regardless of whether this amount would make the payment higher than what the income and expenses say the debtor can afford. There are also fees and trustee commissions that must be paid in the Chapter 13 Plan. Unsecured creditors should also get some distribution, even if it is minimal.

A good lawyer knows how the income and expenses should be stated to make sure the debtor has a Chapter 13 payment that is feasible. Many times when a person files on their own (also know as "pro se") they do not do a good accounting of expenses, which results in an excessively high plan payment. An experienced attorney knows where to look and what questions to ask to make sure legitimate expenses are not missed.

Seth W. Diamond is an attorney at Laura Margulies & Associates, LLC. in Rockville, Maryland. His firm represents individuals and companies in bankruptcy and litigation matters in Maryland and the District of Columbia. For more information about bankruptcy and the services offered by his firm, please feel free to visit the firm's website. If you would like to schedule an appointment to discuss bankruptcy with an attorney, call 301-816-1600, or click here.