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Message #62
Date:
14-Mar-05
From: Steve Leimberg's Asset Protection Planning Newsletter
Subject: New Bankruptcy Bill - Who Pays It?
The new bankruptcy bill is important. It is so important,
LISI plans several commentaries on it. In our first, Alan S.
Gassman and Jonathan Alper discuss their take on the new Bankruptcy
law.
Alan S. Gassman of Alan S. Gassman, P.A., practices in Clearwater,
Florida in the areas of estate tax and trust planning, taxation,
physician representation, and corporate and business law. Jonathan
Alper is an asset protection and bankruptcy attorney practicing
in Orlando, Florida.
According to Alan and Jonathan, you might call this new bankruptcy
law, THE CREDITORS STRIKE BACK! Or, you might call it, THE DRAMA
OF ASSET AND INCOME CONFISCATION. Or, "I'M SORRY,
THE DOCTOR TOOK A JOB IN A CLINIC FOR THE NEXT FIVE YEARS"
EXECUTIVE SUMMARY:
The new bankruptcy bill would destroy the ability of "high
earner" individuals to file a Chapter 7 bankruptcy and
extinguish debt without sacrificing significant income. The
bill also limits the homestead exemption to $125,000 in bankruptcy
for many debtors, and contains a 10-year look-back provision
in "fraudulent transfer" asset protection trust situations.
MORE ON THE NEW BANKRUPTCY LAW TO FOLLOW. BUT FIRST, EDITOR
ANDY DeMAIO ISSUES A LAWTHREADS ALERT!
1. DOES AN AGENT UNDER A POWER OF ATTORNEY HAVE A DUTY TO MAKE
GIFTS?
Under the terms of applicable law and the power of attorney
itself, an agent often has the power to make gifts from the
principal. Does the power create a potential liability for the
agent? If no gifts are made, can the agent be held liable for
taxes that could have been saved? Practitioners mull the issue
in a recent ABA-PTL discussion.
2. ESTATE DEFECTIVE TRUST ALLOWS INCOME TAX PLANNING
PLR 200502014 illustrates a technique for creating a trust that
is included in the estate of the grantor for estate tax purposes,
permitting a step-up in basis, but whose income is taxed to
beneficiaries. Such a trust can also provide non tax related
personal benefits, according to participants in a recent online
thread. A January, 2005 article explaining the technique is
also available online.
To read these and other recent LawThreads reports, log in at
http://www.leimbergservices.com. Once logged in, click the blue
LawThreads button under Recent Entries.
NOW BACK TO ALAN GASSMAN AND
JONATHAN ALPER'S COMMENTARY:
FACTS:
The United States Senate has passed a new bankruptcy law. This
law will come into effect if agreed upon by the House of Representatives
and signed by the President. Most commentators expect the President
will sign the Bill in April. The Bill states that the law will
be effective 180 after passage. This Bill contains provisions
that are of paramount concern to potential debtors and their
advisors.
COMMENTS:
NO MORE CHAPTER 7 FOR HIGH INCOME DEBTORS!
Of primary concern is that the ability to extinguish all debt
by filing a Chapter 7 bankruptcy will NOT apply where the debtor
has income above the state median.
In order to extinguish all debt, a debtor with income exceeding
the state median would have to enter into a 5-year payment plan
whereby most, if not all, of the income above a fairly low level
would have to paid to the creditor.
Most affluent debtors would have to spend down exempt assets
to make ends meet during this 5-year period, especially if they
have children in private schools.
DEBTOR FUGITIVES
Debtors with judgments against them may never have to seek a
discharge of debt in bankruptcy, but would be gravely inconvenienced
by having to structure their lives going forward to remain "judgment
proof."
A non-bankrupt debtor would not lose his or her exempt assets,
but would have "debtor fugitive" status by having
to work and live without having exposed assets. Such a debtor
might have to take a job in a state where wages are protected
from garnishment, and where these wages may be converted to
other assets that could be used in a livable fashion. For example,
a Florida debtor can convert wages to annuities, life insurance
policies, and homestead, notwithstanding that there would be
a judgment in place against him or her.
In such a situation it would be expected that a plaintiff would
settle for an amount significantly less than the judgment in
order to get paid something, as opposed to waiting for years
to see whether the debtor would ever have exposed assets.
HOMESTEAD PROTECTION – NEW 3 YEAR FOUR MONTH RULE
Another notable feature of the Senate Bankruptcy Bill involves
the homestead protection available in many states. Florida,
Texas, and Iowa, for example, protect unlimited amounts of homestead
value. Homestead would still be protected to the extent of existing
state law if it has been owned and lived in for at least 3 years
and 4 months.
It is important to note that state law homestead protection
will still apply so long as the debtor does not declare bankruptcy.
The Bill has no negative impact on a situation where a debtor
has lived in their home for 3 years and 4 months, even if the
debtor recently paid down significant portions of the mortgage.
Where the home was purchased within 3 years and 4 months of
filing bankruptcy, and was purchased with the proceeds of the
sale of another home that was owned at the 3 year-4 month point,
then the new home is still protected to the extent of the value
derived from the proceeds of the sale of the old home.
Even if the home qualifies for protection under the 3 year-4
month rule, debtors who are convicted of "any criminal
act, intentional tort, or willful or reckless misconduct that
caused serious physical injury or death to another individual
in the preceding 5 years" as part of their judgment would
not have the home protected if they file a bankruptcy.
TENANTS BY THE ENTIRETIES
Many states exempt real property owned by husband and wife as
tenants by entireties from creditor claims where only one spouse
is a debtor. In those states, a married couple's house will
still be absolutely protected from the creditors of one spouse
if it is held as tenants by entireties between husband and wife.
For example, if a multi-million dollar judgment is placed against
a husband who owns a home as a tenant by the entirety with his
wife, then upon filing bankruptcy, there will be no limitation
on protection of the home because of the tenancy by the entireties
rules.
Tenancy by entireties is a common law rule of property ownership,
and bankruptcy law has traditionally deferred to state property
law.
Many clients will continue to have their spouses own most or
all of the family investment assets, particularly where tenancy
by the entireties protection is not available.
INVOLUNTARY BANKRUPTCY
Many debtors will ask whether a malpractice creditor could force
them out of state law protections and into an involuntary bankruptcy
under the new bankruptcy law.
The answer? The Bankruptcy Reform Act does not significantly
change the rules applicable to involuntary bankruptcy.
A single creditor may file a petition for involuntary bankruptcy
if the debtor has fewer than 12 unsecured creditors. Considering
credit cards, utilities, and other normal household debts, most
doctors will have more than 12 unsecured creditors. If not,
they can quickly create more unsecured obligations if a lawsuit
is on the horizon.
If a debtor has more than 12 creditors, then an involuntary
petition requires joinder of three creditors. In most cases,
a single malpractice creditor would find it difficult to solicit
smaller unsecured creditors to join in an involuntary petition.
Creditors take a risk in filing an involuntary petition. If
the petition is not successful (and bankruptcy courts often
dismiss or abstain from hearing the petition) the creditors
may be liable for compensatory and punitive damages, as well
as the debtor's attorneys fees and costs.
Nevertheless, because of creditors' enhanced leverage under
the new bankruptcy law the possibility of involuntary bankruptcy
will be much more important for physicians concerned about malpractice
exposure.
TRANSFERS TO CERTAIN TRUSTS
A third important provision provides that a transfer made by
a debtor to a trust that the debtor is a beneficiary of may
be voided if bankruptcy is filed within 10 years of the transfer
and "the debtor made such transfer with actual intent to
hinder, delay, or defraud any entity to which the debtor was
or became, on or after the date that such transfer was made,
indebted." The statute applies to transfers made to "a
self-settled trust or similar devise." Time will tell whether
the courts interpret this law to mean that private placement
offshore life insurance and annuity contracts are "similar
devises," if this legislation is passed.
DOCTORS NEED SPECIAL CARE!
The Senate Bill is definitely bad news for doctors and others
who are victims of an "out of control" court system.
Fortunately, the vast majority of malpractice claims settle
within policy limits, or if not, the carrier will still be responsible
for an excess verdict if there was an opportunity for them to
settle by paying no more than policy limits, and they failed
to do so.
Before this new law comes into effect (180 days after enactment
under the Senate bill), doctors need to carefully review their
asset protection planning, and in many cases more closely monitor
their litigation matters to help assure that the malpractice
insurance carrier will be responsible for any excess verdict.
In many years of practice we have NEVER had a client sustain
an excess malpractice verdict that they had to pay themselves.
Clients who have their asset protection planning prudently arranged,
and who properly monitor and have independent counsel involved
in malpractice matters, will almost never have a significant
probability of sustaining catastrophic results. Most excess
verdicts are paid for by the malpractice insurance carriers
that had the opportunity to settle within policy limits, which
helps to explain high malpractice insurance rates.
We have, however, had a number of clients go bankrupt as a result
of their malpractice carriers "going under" while
in the process of defending a claim. This makes it all the more
important to make sure that insurance carriers and coverage
are appropriately in place.
HOPE IN THE HOUSE?
Hopefully the House of Representatives will see fit to limit
these terrible proposed provisions to credit card and other
"consumer debt" situations. We will know shortly whether
the proponents of saving the victims of "the out-of-control
jury system" have succumbed to the credit card industry
in leaving professionals and unfortunate entrepreneurs and others
"hanging in the wind."
CONCLUSION
Planners are more challenged than ever as our clients are squeezed
by an out-of-control jury trial system, rising malpractice insurance
rates, and fewer and fewer places "to hide" when misfortune
comes their way. Estate and asset protection planners are going
to need to provide as much leverage as possible through proper
advance planning for clients who may become debtors under catastrophic
circumstances, especially in the face of this upcoming legislation.
HOPE THIS HELPS YOU HELP OTHERS!
Alan Gassman and Jonathan Alper
Edited by Steve Leimberg
CITES:
Senate Bill 256, Bankruptcy Abuse Prevention and Consumer Protection
Act of 2005, to amend Title 11, United States Code, Involuntary
Bankruptcy rules are found under Section 303(a)(b) of the Bankruptcy
Code and the Chapter 13 rules are found at §§1326,
1327, 1328, and 1329.
Copyright © 2005 Leimberg Information Services Inc.
