When BAPCPA first passed the exemption issue that caught the most attention was the homestead cap. I thought at the time that this would be a non-issue for my practice, because I just don’t have clients with more than $125,000 in equity in their homesteads. Even if I do it will be because they have lived in the property forever and paid it off — so, the homestead cap won’t apply, because they haven’t acquired it in the last few years.

The two areas of exemption changes that I was leery of are:

1. That the residency requirements to determine the available exemptions apply to all exemptions, not just homestead; and
2. The subjection of exempt property to so-calledDomestic Support Obligations which is a new term that basically covers child support and alimony

I had visions of ex-spouses showing up in the Bankruptcy Court and filing motions for turnover of the debtor’s home, car, gun collections and retirement account. The experts assured me I was wrong.

One set of experts insisted that the scenario was much worse, because the Trustee would be administering exempt assets. I didn’t see how this would work, because the Trustee’s authority is limited to property of the estate, and nothing in 522 brings this property back into the estate after the Debtor files his claim of exemption.

The other school of experts explained to me that what this statute really means is that post-discharge State law exemptions do not reattach to the exempt property with respect to support creditors. I never managed to understand this argument. Neither have the courts.

As of last week, we now have at least two written opinions interpreting this provision making exempt property subject to the claims of support creditors. In re: Quezada, Case No. 06-15240-BKC-RAM, (Bankr., S.D. Fla., Miami Div. 2007); and In re: Covington, Case No. 06-21066-A-7, (Bankr. E.D. Ca., Sacramento Div., 2006). In both of these opinions the Court has held that the Trustee does not have the power to administer exempt assets. However, the Court has also found, although in dicta in Quezada, that the support creditor does have standing to appear and demand turnover of the property.

To think the Bankruptcy Judges all thought that with the repeal of the balancing test in 523(a)(15) they were getting out of the family law business.

Elaine

Traditionally, the answer to a client who calls about filing for bankruptcy but the client’s only problem debt is almost too old to be legally collectible, or the client has no income or assets a judgment creditor could seize; is to ask the client why they want to bother. The client is in a position to basically outrun the debt. Why file for bankruptcy if you don’t have to when you can only file a Chapter 7 every eight years under the new act?

Well, that answer may have changed. When consumer attorneys were all distracted by the passage of the new Bankruptcy Code, the IRS passed a new regulation governing the reporting of forgiven debt. If you are interested the Regulation is 26 C.F.R. 1.6050P-1 and 2.

It has always been the case that if you settle debt for less than face value, you could expect the creditor to issue a 1099-C reporting the value of the forgiven debt, because the Internal Revenue Code’s definition of gross income includes forgiving part or all of a debt. Now, however, the IRS is defining certain events that constitute debt forgiveness and trigger a reporting requirement on the part of the creditor. One of the triggering events is no payments for 36 months. Of course, nowhere in the regulation does it specify that reporting the debt as forgiven means that it cannot still be collected or sold to someone else and collected.

So now, when attorneys advise clients about the repercussions of not filing for Bankruptcy, we are going to have to warn them that even if they get away with not paying the debt, they might wind up with tax liability for the amount of the debt. Oh, and they may not be able to get out of that tax liability even by subsequently filing for bankruptcy.

On the other hand, if they file for Bankruptcy before the 1099 issues, the Bankruptcy Code’s discharge is defined as a non-taxable event. So, filing definitely stops the collection of the debt and the possible tax ramifications as well.

I’m beginning to be grateful I took 9 hours of tax in law school.

Elaine Dowling

http://www.DowlingLawOffice.com