2012 February Archive

Pensions and Bankruptcy

In general, a pension is an asset. However, the question is whether a debtor can fully exempt and keep their pension. The bankruptcy code permits a debtor to exempt and keep their entire pension, if the pension is ERISA (Employee Retirement Income Security Act) qualified. In other words, the pensions must be legitimate under the tax code.

ERISA permits two types of pensions, defined benefit plans and defined contribution plans. The defined benefits plans, promises to pay a retired individual a specific monthly amount based on different factors, such as a percentage of income earned and the years of service of the employee. The defined contribution plans are plans that are funded from the employee and possibly the employers’ contributions over the years of service. At retirement, the employee is entitled to the available funds that have accumulated from the funds’ investments. The following are examples of defined contribution plans: employee stock ownership; 401(k); 403(b); and, profit-sharing plans. Typically, in a chapter 13 and 7, all of the above referenced plans are fully exempt under the bankruptcy code, with few exceptions. This means that a debtor can keep all of the funds in the plan.

Chapter 7
The other issue pertains to whether a debtor may use as an expense, the monthly payments of the pension plan contribution. Typically, in a chapter 7, a debtor may only use a monthly pension contribution payment as a monthly expense, if the monthly contribution is required. An example is a New Jersey state employee’s monthly pension contribution. However, in general, an employee of a private company is not required to contribute to their pension. Therefore, under this scenario, the monthly contribution is not permitted as a legitimate monthly expense on the petition. Typically, the chapter 7 trustees will allow the debtors to use any monthly pension loan contribution as a legitimate monthly expense.

Chapter 13
Similar to a chapter 7, a chapter 13 debtor is permitted to use any monthly pension loan contribution as a legitimate monthly expense. In a chapter 13, a debtor may use as an expense, a monthly contribution to a pension, even though the contribution is not required by law. However, the monthly contribution must be reasonable.

Please call the Law Offices of Robert Manchel, the NJ. bankruptcy attorneys, at 1 (866) 503-5655, to discuss your bankruptcy questions.

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Prior to Filing

Prior for filing a bankruptcy petition, debtors must obtain a “Pre-Bankruptcy Screening” or “Pre-Bankruptcy Counseling” from a credit counseling agency approved by the U.S. Trustee’s office. The agency issues a certificate which is provided to the debtor’s attorney to file with the bankruptcy petition. This certificate is valid for six months. It is best to meet with an attorney prior to obtaining the certificate in order to make sure that a bankruptcy filing is appropriate as well as to determine when the best time would be for filing. There are often considerations which can have an effect on the best time for a party to file, including income and asset issues.

Along with the certificate, the attorney will collect information from the debtor on his income, assets, liabilities, and expenses to prepare the petition to file on the debtor’s behalf. The law requires the debtor to submit proof of his or her income and to provide copies of their federal tax returns upon filing.

The attorney will need fairly detailed information on the assets owned by the debtor in order to determine if the assets are “exempt” under the Bankruptcy Code. Assets that are exempt are those that the debtor is able to retain. The attorney will help the debtor decide whether to file using state or federal exemptions. This will depend on the amount and type of assets the party owns and what it is most important for him to protect. In general, the federal Bankruptcy Exemptions tend to be generous enough that the majority of Chapter 7 filers do not have to turn over any of their assets. For example, under the federal bankruptcy exemptions, all qualified retirement savings (pensions, IRAs 401(k)s are exempt. There are exemptions available for a certain amount of equity in a home, for value in a car, for household goods and furnishings, and then there is a federal “wild-card” exemption which can be applied to any property up to a certain amount.

The attorney will also collect information on the debts owed. There are three major credit reporting agencies from which debts can be determined – Transunion, Experian, and Equifax. All through credit reports can be obtained at www.annualcreditreport.com at no charge. It is also important to let your attorney know of any other debts which might not appear on the credit report, such as loans from friends or relatives, medical bills and any other debts owed.

In order to determine if a debtor qualifies for a Chapter 7 filing, the attorney will evaluate his or her income and expenses. To qualify, a debtor’s income must either be at or below the median income of the geographical area of the country in which he or she lives – or – the debtor must have necessary but extraordinary expenses that qualify a debtor with higher income. If a debtor’s income is at or below the mandatory figures, they qualify for a Chapter 7 filing. If their income is higher but they also have substantial and necessary medical expenses, they may still qualify even with the higher income. If the debtor does not qualify for a Chapter 7, he or she can discuss the ramifications of filing a Chapter 13 petition with their attorney.

The most important thing an individual can do prior to filing bankruptcy is to meet with a qualified attorney that can lead him or her through the process so that an initial determination can be made as to whether bankruptcy is the correct step. Taking the time to make sure that the attorney as all of the needed information can make the entire process one that is much less stressful for the debtor and helps to make sure that the debtor emerges from bankruptcy with the “fresh start” the law was enacted to provide.

If you have questions regarding bankruptcy, call thebankruptcy expert in New Jersey, Robert Manchel, at (866) 503-5655 to discuss your options.

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Bankruptcy is often viewed as an individual’s last resort when financial difficulties arise. And while we do not suggest that filing for bankruptcy would, or should, be anyone’s first choice, it is often, ultimately, the best, most comprehensive, solution to an individual’s financial problems. Certainly, if you find yourself facing overwhelming consumer or business debt, your first step should be to seek the counsel of a qualified bankruptcy attorney.

Unlike the numerous “debt reduction” or “debt consolidation” firms that flood our airways with advertisements, a licensed professional bankruptcy attorney is uniquely qualified to review your case and determine if bankruptcy is the proper course of action for you. Licensed attorneys have taken an oath to represent their clients to the best of their ability. Additionally, conversations with your attorney are confidential. Non-attorney debt firms do not have these same obligations. It is, therefore, better to speak with an attorney first, rather than last.

The process of filing for bankruptcy protection may seem relatively simple for the debtor, but it requires knowledge of very complex bankruptcy laws and regulations and should not be attempted without qualified legal representation. Failure to timely and correctly file required court documents can result in a case’s dismissal or the loss of property.

What follows here is a general overview of the bankruptcy process and requirements for an individual or married couple. There is more detailed information as well as clarification of a number of common misconceptions about bankruptcy which are addressed in more detail in following sections.

Bankruptcy Overview

When an individual, referred to as a “debtor”, files for bankruptcy, he is filing for “relief” or “protection” under the United States Bankruptcy Code. The creation of a Bankruptcy Law is provided for in the U.S. Constitution. An individual may file either under Chapter 7 of the Bankruptcy Code, referred to as “liquidation”, or under Chapter 13, which is often referred to as “reorganization.”

Many people believe that if they file for bankruptcy, they must give up all of their property. To the contrary, however, the Bankruptcy Code provides for what are called “Exemptions” under Section 522 of the Bankruptcy Code which allow for certain values a debtor may hold in various types of property such as real estate, household goods, automobiles, retirement funds, and other property.

Three types of debts are addressed in a debtor’s bankruptcy filing: 1) Secured Debts which include mortgages, car liens, tax and judgment liens; 2) Priority Debts which include unliened taxes, child and marital support obligations; 3) Unsecured Debts which include credit card debt, old utility bills, medical bills, pay-day loans and personal loans.

When a bankruptcy case is filed, the “automatic stay” goes into effect, pursuant to Section 362 of the Bankruptcy Code. This “stay” means that none of the debtor’s creditors may take any further steps to collect on a debt. They cannot call or write the debtor, they cannot file or continue a lawsuit, or execute on a judgment without first receiving the Bankruptcy Court’s permission to do so.

At the completion of a case under Chapter 7, the debtor’s unsecured debts are “discharged”, meaning the debtor no longer has a legal obligation to pay those debts. If the debtor wants to retain property that is subject to a secured debt, such as his home or car, he must continue to make those payments. (More on secured debts below).

At the completion of a Chapter 13 case, after the “Plan of Reorganization” has completed, the debtor also receives a discharge of any remaining unsecured debt. As with a Chapter 7 filing, the debtor must continue to pay secured debt to retain the property.

Robert Manchel,New Jersey bankruptcy practitioner, will explain how bankruptcy can help you with your debt.

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Will I lose my tax refund in Chapter 13 bankruptcy?

While in a Chapter 13, you are making monthly payments to a bankruptcy trustee. You pay your creditors whatever you can afford over three to five years (three years for lower income earners, five years for higher wage earners). You are required to commit your disposable income to the repayment plan during the repayment period. You are also required to pay as much to unsecured creditors as they would receive in a Chapter 7 bankruptcy.

Unfortunately, an expected income tax refund is property of the bankruptcy estate. Many filers are able to protect all or a portion of their income tax refunds by applying their bankruptcy exemptions to the expected refund. Generally, after using all of your available exemptions, the remaining unprotected amount is often little or nothing.

If you cannot protect your tax refund with exemptions, you are required to pay the non-exempt amount in your monthly plan payments. This is because your unsecured creditors would get this money if you filed a Chapter 7 bankruptcy.
Working closely with my office will maximize the amount of money you get to keep.

If you are expecting a large income tax refund, but need to file a Chapter 13 bankruptcy case, contact the NJ. bankruptcy law expert, Robert Manchel, at (866) 503-5655 to discuss your options. We can explain how the federal laws can protect your assets and discharge your debts.

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