Author Archives: Ryan C. Wood

About Ryan C. Wood

Ryan C. Wood is a California attorney practicing primarily in the areas of Bankruptcy Law, Business Law and generally seeking justice for under represented clients in the Bay Area.

What Happens to My Children’s Bank Accounts if I File Bankruptcy?

By Ryan C. Wood

Most parents want to be able to provide for their children’s financial future. What happens when you personally file for bankruptcy and have bank accounts in your children’s names? Is the money set aside for your children in danger of being taken by the trustee assigned to your bankruptcy case? The answer is “it depends” upon the type of the account and its purpose. You should speak with your bankruptcy attorney when you are filing for bankruptcy to see how different accounts may affect your bankruptcy estate and how it may affect your children’s accounts.

Bank Accounts in Childs Name

If you open a bank account that is a standard checking or savings account in your child’s name you will have to be an account holder too since the child is not 18 years old yet. Money deposited in these accounts will be considered an asset of your bankruptcy estate if you file for bankruptcy protection.

UTMA Accounts

Once funds are transferred to an UTMA account, the funds are out of your name and belong solely to the child listed as the beneficiary. Since your children are minors and cannot have an account in their name, your name will most likely be listed as the custodian for your children in the account. This does not make the account yours. In fact, the transfers into an UTMA account are irrevocable in nature and cannot be transferred back. The money can be spent for the benefit of your children however. You cannot use the funds in the UTMA account for regular parental obligation expenses, such as food, housing, clothing. You can use the funds for your children such as for their education or educational tools like laptops or computers. UTMA accounts are considered to be an asset for your children so if they are applying for financial aid that needs to be taken into consideration. So what does this mean if you have to file for bankruptcy? Since the UTMA account is not an asset of yours it is not listed in your bankruptcy petition. There may be some issues with the UTMA account if it is determined that the reason you transferred the funds from your account to the UTMA account is to deprive your creditors of those funds. If that is found to be the case the transfers could be voided as a fraudulent transaction and brought back into your bankruptcy estate.

529 Plans

A 529 plan is a college savings plan that allows parents to contribute funds into the account for their children’s educational needs. It is a tax deferred plan and if the account is actually used for educational purposes it is actually tax free. A 529 plan is an asset that usually belongs to the parents. Therefore if the parents file for bankruptcy it is considered an asset of the parents. The funds that have been contributed to the 529 plan more than 2 years ago are protected from creditors in bankruptcy. If the funds were contributed between 1 to 2 years ago, the 529 plan is protected up to $5,000 per beneficiary. If the funds were contributed to the 529 plan less than a year ago it is not protected and is considered an asset of the bankruptcy estate unless you have available exemptions to protect that asset.

It is highly recommended that you tell your bankruptcy lawyer the specifics of the account so they can help you determine how to best protect the account if possible. You should not keep it from them because you think you know that it is not an asset of the bankruptcy estate. Let them determine that for themselves.

Supreme Court Strikes Down Defense of Marriage Act – How Does it Affect Bankruptcy?

By Ryan C. Wood

The Supreme Court of the United States held that the Defense of Marriage Act (DOMA) was unconstitutional this past Wednesday, June 26, 2013 in United States v. Windsor, Executor of the Estate of Spyer, et al. 570 U.S. ___ (2013). The Defense of Marriage Act defined marriage as between a heterosexual couple for purposes of federal laws. This meant that marriage between same-sex couples were not recognized by the federal government. This recent Supreme Court decision is a historic victory for couples in same-sex marriages.

In the Windsor case, Edith Windsor married Thea Spyer in Canada. When Spyer passed away and left her entire estate to Windsor, Windsor was hit with a huge estate tax bill. If Windsor and Spyer’s marriage was recognized by the federal government, Windsor would have been able to claim the estate tax exemption for surviving spouses. This would mean that Windsor would not have owed anything to the federal government. Windsor paid the estate tax bill and then sought a refund from the Internal Revenue Service. The IRS denied the refund. Windsor brought the lawsuit to the District Court. The court ruled against the United States and ordered the U.S. Treasury to refund Windsor’s tax with interest. The Second Circuit affirmed the District Court’s decision. The Supreme Court granted certiorari and held that DOMA violates the due process and equal protection principles applicable to the Federal Government.

With DOMA struck down, married same-sex couples will be able to enjoy the same federal benefits as married heterosexual couples. One of the biggest benefits is as the Windsor case indicated: significant savings on estate taxes for inheritances because of the exemptions available for spouses. Windsor had to pay over $363,000 in estate taxes. If her marriage was recognized under the federal government, she would not have owed any taxes. That’s over $363,000 in savings. Keep in mind the savings may vary due to the different sizes of each estate.

Another benefit that same-sex couples can now enjoy is that they get to file their federal tax returns together. This may mean higher refunds or lower taxes being paid out since married couples have more exemptions available to them on the tax returns. Previously, same-sex couples would need to file their federal returns as “single” and their state tax returns as “married” if they were in a state that recognized same-sex marriages. This may seem like a trivial thing for people that are used to filing taxes together, but it is a hassle to file so many different returns.

Same-sex couples may now also file their bankruptcy cases together since the federal government now recognizes their existence. Previously same-sex couples would need their bankruptcy attorney to file two separate bankruptcy petitions even if it involved the same assets. This means they would potentially have to pay their bankruptcy lawyer twice and pay the filing fee twice. Now that they can file their bankruptcy petitions together they can save some of their hard earned money.

The above benefits are only some of the benefits of having DOMA struck down. It is not an exhaustive list. There are many benefits, some of them significant, some of them trivial, but to people in same-sex marriages this is a huge step towards equality.

What is Chapter 20 Bankruptcy Case?

By Ryan C. Wood

Every so often I get asked about what the possibilities of are of filing a Chapter 20 bankruptcy. Chapter 20‘s are not usually asked for by name given that not too many people know what a Chapter 20 bankruptcy is. A Chapter 20 bankruptcy is when you have essentially filed a Chapter 7 bankruptcy and then subsequently file a Chapter 13 bankruptcy (7 + 13 = 20). Normally you have to wait 4 years after filing a Chapter 7 bankruptcy before you can file a Chapter 13 bankruptcy case and be eligible to receive a discharge of your debts.

What are the situations where you would need to file a Chapter 20 bankruptcy?

Wouldn’t it be simpler and cheaper to just file a Chapter 13 the first time around? Yes, most of the time it would be simpler if you had just filed a Chapter 13 so there are not as many issues. However, that is sometimes not possible due to the circumstances. People sometimes file for a Chapter 7 first to discharge of all their unsecured debts before filing a Chapter 13 because they may be over the debt limitations under 11 U.S.C. §109(e). You are not eligible to be a debtor under Chapter 13 is your unsecured, liquidated, noncontingent debts exceed $383,175, or secured, liquidated, noncontingent debts exceed $1,149,525. Another scenario may be they file for a Chapter 7 to discharge their unsecured debt but later find themselves with mortgage arrears and are facing foreclosure so they need to file a Chapter 13 bankruptcy case to save their home. If you are considering a Chapter 20 bankruptcy you should consult with an experienced bankruptcy attorney to help you with the case as it may be fairly complicated.

Chapter 20 and Lien Stripping

One of the biggest questions currently is whether you can strip your junior mortgage in your Chapter 13 bankruptcy case if you have already received a discharge of your debt in your previous Chapter 7 case. Since you have already received a discharge of your debts in your Chapter 7 case you will not be receiving a discharge of your debts in the Chapter 13 case. Sometimes a discharge is not necessary though. For example, if you are filing a Chapter 13 case to pay back arrears in the plan there is no need for a discharge. There are some creditors that will argue that you cannot get a lien strip in your current Chapter 13 case if you will not receive a discharge. Fortunately, the Ninth Circuit holds that a lien strip in your current Chapter 13 case is possible so long as you successfully complete your Chapter 13 plan. This means your bankruptcy lawyer can help you strip your underwater junior mortgages, but you have to make sure you make all the Chapter 13 plan payments in order for the lien to be stripped.

Another issue in filing a Chapter 20 bankruptcy case is good faith. You cannot file a Chapter 20 case simply to do a lien strip. There are many factors to determine good faith: 1) whether the debtor misrepresented facts in the petition or plan, unfairly manipulated the Bankruptcy Code, or otherwise filed the Chapter 13 petition or plan in an inequitable manner; 2) the debtor’s history of filings and dismissals; 3) whether the debtor only intended to defeat state court litigation; and 4) whether egregious behavior is present. In re Leavitt, 171 F.3d 1219 (9th Circuit 1999). The courts will look at the totality of the circumstances to determine whether the case was filed in good faith.

Increased Bankruptcy Exemptions in California as of April 2013

By Ryan C. Wood

In January 2013 California Assembly Bill 929 increased the exemptions available to protect your property in California. As of April 1, 2013, the exemptions available increased even more under California Civil Procedure sections 703 and 704. This is great news to a lot of people who were thinking of filing for bankruptcy protection. Your bankruptcy lawyer will now have more options to protect your assets. It may provide some comfort knowing that more assets can be protected. Here are some of the changes as of April 1, 2013:

California C.C.P. §703.140 Exemptions:
• $25,075 in homestead or burial plot (previously $24,060). This means that if you have any equity in your residential property you can use this exemption to protect the equity.
• $26,425 wildcard exemption: this exemption consists of $1,350 plus any unused portion of the $25,075 homestead or burial plot exemption (previously $25,340).
• $5,100 in one or more motor vehicles (previously $4,800).
• $650 in any single item of household goods (previously $600). Note this is per item; if the current market values of all of your household goods are less than $650 each they are all protected.
• $1,525 jewelry (previously $1,425)
• $7,575 tools of trade (previously $7,175)
• $13,675 unmatured life insurance policies (previously $12,860)
• $25,575 personal injury payments (previously $22,075)

California C.C.P. §704.730 Exemptions:
• $2,900 motor vehicle exemption (previously $2,725)
• $7,625 jewelry, heirlooms, and works of art (previously $7,175)
• $7,625 tools of trade for only one spouse (previously $7,175)
• $15,250 tools of trade for both spouses (previously $14,350)
• $1,525 public benefits for one payee (previously $1,425)
• $2,275 public benefits for joint payees (previously $2,150)
• $3,050 social security benefits for one payee (previously $2,875)
• $4,575 social security benefits for joint payees (previously $4,300)

Since the publishing of this article, the homestead and burial plot exemption under §703 have increased to $25,575 from $25,075. This means that the wildcard exemption can be up to $26,925. The wildcard exemption consists of any unused portion of the homestead exemption above plus $1,350. The tools of trade and professional books exemption has also increased to $7,625 from $7,575.

The exemptions above are only some of the changes; it does not encompass all the changes of exemptions. The homestead exemptions under CCP §704 remain the same: $75,000 for a single person, $100,000 if you are a member of family unit where one or more members of the family do not own an interest in the homestead or whose only interest is a community property interest or $175,000 if: 1) you are 65 years or older, 2) physically or mentally disabled and cannot work as a result, or 3) 55 years or older with gross annual income of less than $25,000 for a single person or $35,000 if married and there is an attempted involuntary sale. With home prices on the rise in most areas your bankruptcy attorney will most likely recommend obtaining an appraisal.

Since you have to choose CCP §703 or CCP §704 exemptions (you cannot use both) it is generally beneficial to use the CCP §703 exemptions because there is the generous wildcard exemption to protect more of your assets unless you have a home that has a lot of equity that needs to be protected. Your bankruptcy attorney would be able to help you determine which of these exemptions to use to benefit your situation the most.

What Mental State is Required for Defalcation While Acting in a Fiduciary Capacity?

By Ryan C. Wood

It has long been understood that under 11 U.S.C. §523(a)(4), you would not be able to receive a discharge of your debts in bankruptcy if those debts were incurred due to a fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny. On May 13, 2013, the Supreme Court described the scienter (state of mind) necessary to be considered “defalcation” in the case of Bullock v. BankChampaign, N.A., 569 U.S. _____ (2013).

In Bullock, Bullock’s dad made him the trustee in a trust that was established for Bullock and his four other siblings. Bullock borrowed money from the trust but he made sure the trust was repaid with interest every time he borrowed money. Bullock’s siblings sued him for a breach of fiduciary duty in state court and won. The state court imposed constructive trusts for the judgment and BankChampaign served as the trustee for the trusts. Bullock had to file bankruptcy because he was not able to liquidate his assets to pay for the judgment. BankChampaign opposed the discharge of the debt because it claimed the debt was for defalcation while acting in a fiduciary duty. After the bankruptcy court, federal court, and court of appeals all affirmed that the debt was not dischargeable, Bullock sought certiorari to decide whether defalcation applied even if there was no ill intent.

The Supreme Court concluded that defalcation requires an intentional wrong. “We include as intentional not only conduct that the fiduciary knows is improper but also reckless conduct of the kind that the criminal law often treats as equivalent…Where actual knowledge of wrongdoing is lacking, we consider conduct as equivalent if the fiduciary ‘consciously disregards’ (or is willfully blind to) ‘a substantial and unjustifiable risk’ that his conduct will turn out to violate a fiduciary duty.” Bullock v. BankChampaign, N.A., 569 U.S. _____ (2013).

The Supreme Court decided to hear this case because there were different rulings throughout the country on whether a mental state was necessary to determine if there was defalcation. In the Ninth Circuit a bankruptcy lawyer only had to prove an innocent mistake took place by a fiduciary. Some circuits considered an act to be defalcation if the person did or fail to do something they were required to do in their fiduciary capacity. Whether the person knew the act or failure to act was wrong or not did not matter. Then there were some circuits that required a showing of extreme recklessness. The Supreme Court wanted to be sure that all the circuits applied the same standards and their ruling are more consistent. This also means that creditors objecting to the discharge of certain debts due to defalcation have more to prove. Their bankruptcy attorney cannot just claim that there was a wrongdoing, but now must prove actual intent to harm or recklessness. Did the debtor act in a way that a law abiding person would in the same circumstances? There are many questions that remain to be answered regarding this new defalcation requirement.