Uncle Sam a strict creditor to deal with

As appears in the Lee's Summit Journal

That time of year has come again: tax season.

Across our city and the country, individuals are getting the last of their tax documents together, collecting their receipts, and either heading off to their accountant or settling down in front of their computer to prepare their Form 1040, along with state and local counterparts.

This highly entertaining diversion usually leads to one of two reactions – either plotting how to spend the tax refund, or complaining about tax rates being too high. (You would think that tax rates are at an all-time high given how much attention they get from our politicians. Actually, income tax rates are their lowest in over 50 years. But no one likes to write a check to the IRS.)

If you are among the unlucky who need to write a check to the U.S. Treasury to cover your tax liabilities, I suggest you put paying them near the top of your to-do list. Tax debts are among the hardest debts to be rid of, and the tax agencies among the most powerful creditors a person will deal with.

Obviously, your personal income tax debts can be charged to you (filing a return basically admits some liability in that regard), but if you run or own a business, many of those tax liabilities can fall upon you, the person, in the event the company does not pay its tax bill. These taxes include corporate income tax liability, and any liability for withholding taxes (employee’s income taxes, social security and medicare).

Once the tax liability is incurred, the IRS has more power to collect than does almost any other creditor.

While a credit card has to file a lawsuit and obtain a judgment in order to take action against your property, the IRS (via federal law) can begin wage garnishment, bank account garnishment and place liens on your real and personal property without having to go to court.

An IRS garnishment can take a higher percentage of your income than can a civil judgment creditor. Additionally, outstanding tax debt can impair your ability to qualify for SBA loans and other government-backed programs.

All in all, the federal government is serious in guaranteeing its ability to collect its own debts.

Tax debt gets favorable treatment under bankruptcy law, as well. While almost all consumer debt, including civil judgments, will discharge in a bankruptcy, the vast majority of tax debts do not discharge. Income taxes that are old enough and have been filed for long enough can be discharged, and most property taxes older than one year are dischargeable. “Trust fund” taxes (taxes collected for the benefit of others), however, are never dischargeable. So if your business is closing, a first step in dissolution should be to get right with Internal Revenue.

If you find yourself with a significant tax bill and cannot simply pay it off, you may feel stuck between a rock and hard place. The debt won’t go away, but it also can really do damage if pushed to collection by force.

The simple answer is to not ignore the problem. The IRS has made significant efforts over the years to soften its reputation and tactics as it relates to individuals and their tax debts. Contact the IRS and work with their customer service representatives to create a payment plan that allows you to meet your living expenses and honor your tax obligations. If you wish, it is often wise to speak to an experienced tax professional, who may be able to represent you and guide you through the available options to get that debt managed.

Finally, if your debt burden is simply too great to manage at one time, speaking to a bankruptcy attorney or debt management expert may help tackle other debts, leaving enough money to allow you to manage the IRS, state department of revenue, or county collector.

Once you understand the power available to collect, and the (relatively) permanent nature of tax debts, and place the proper priority on their repayment, your tax liabilities should be under your power to control.

Jason Norbury is an attorney in Lee’s Summit who specializes in bankruptcy representation.

Exemptions protect some items from creditors

As appears in the Lee's Summit Journal

I have said in this space before, and it has been said many times elsewhere, that someone getting a judgment against you is a bad thing.

When a creditor has a judgment, they gain certain powers over you, powers granted by state and federal law. The two main powers gained are (in many instances) a lien on your real estate and the ability to execute on your personal property.

While these things are generally true, most people only see these powers exercised in two main ways: wage garnishment and bank account execution. The law is not limited to these two items, and it is within the ability of a creditor to execute and sell your furniture and TVs, or even force a foreclosure sale on your house. So why don’t judgment creditors do that?

The answer lies in property exemptions.

Each state and the federal government has crafted statutes that allow a person to protect (exempt) certain amounts of value in certain types of property. The types of property and structure of the protection differs by state, but every legislature and some state constitutions have determined that a person is entitled to a certain minimum amount of property that is theirs above the claims of all creditors. This is your state-granted nest egg, in a way.

Being in the Kansas City area, we have the opportunity to see two very different exemptions schemes in our two local states. Missouri has a more “eastern” exemption scheme, while Kansas’ exemptions have a more “western” tilt. Missouri sets, for most property that regular consumers would own, dollar limits on how much property can be owned of a certain type ($3,000 for automobiles, for example). Kansas tends to protect a broad category of property, regardless of dollar amount (or setting a higher limit). A homestead in Kansas is protected regardless of value (so long as it sits on less than an acre), while Missouri allows a $15,000 exemption in your homestead’s equity. This, in part, explains the existence of Mission Hills.

For most people, and in this current real estate climate, there is little property that has a value over and above the exemption amounts. In order to get some money from executing on a person’s household goods in Missouri, a creditor would have to sell more than $3,000 in furniture and electronics before they could keep any money. Having held numerous garage sales, I can tell you that is a near impossibility for most families. Your old couch just isn’t worth much money.

Your wages and liquid assets, however, have much less robust protection. Both Missouri and Kansas limit the protection of your wages to 75 percent of your net income (90 percent if a Missouri head of household). Kansas offers no protection for most cash in a bank account, and Missouri’s is somewhat limited. Given the limited nature of the exemptions, and the ease of dealing with money over tangible personal property, it becomes clear why creditors concentrate their post-judgment collection efforts on wage garnishments and bank account executions.

So what can you do to best protect your most vulnerable property?

The first and most useless answer is to not allow a judgment be taken against you if possible.

If you are sued on a debt, consult an attorney immediately to determine your rights. If a creditor has taken a judgment and is now attempting to garnish wages or bank accounts, call an attorney to determine what you can do to best protect yourself. You may be able to reduce the garnishment amounts to a livable amount, or in the rare case avoid the impact of the garnishment altogether.

Property exemptions can also help you plan where to put your money.

In most jurisdictions, 401(k) and other retirement accounts are protected from creditor attack. Many life insurance policies are also protected to a large cash value.

In Kansas, home equity is generally protected (though there are limits even there). If you have the ability to save some money, security against future creditors is a factor you should consider when making investment decisions.

With a bit of understanding of the structure of property exemption law, you can take steps to best protect your assets, whether before or after a creditor tries to attack them.

Talk to an experienced legal professional if you have questions about your rights.

Jason Norbury is an attorney in Lee’s Summit who specializes in bankruptcy.

How to Handle the Finances of the Deceased

As appears in the Lee's Summit Journal

Death is one of those inevitable events. Not just our own, but it is assured that loved ones will die. When people die, their financial problems (and messy estates) don’t go away with them, and eventually most of us will be left to pick up the pieces left by a parent, sibling, spouse or even a child who has gone before us into the great unknown. Navigating the system is challenging in the best of times, and doing so while grieving may be more than any person can be expected to handle alone.

Let me first get the mini-lecture out of the way: Get your estate plan done. Hire competent professionals, explain to them your goals and let them help you find the right documents, investments and plans to meet those goals. Review those plans every few years, and update them if needed. Also, eat healthy, say your prayers and take your vitamins. End Lecture.

Moving on to other people’s decedent estates, they can be divided in two main camps: those with an estate plan, and those without (intestate). If you are “lucky” enough to be left in charge of a well-planned estate, the process is often simply following the instructions of the estate plan. If done right, you can even avoid probate court involvement. Real estate and other property will have to be retitled, any investment accounts will pass according to their terms, and any legitimate creditors of the departed will have to be addressed. Even in this comparatively simple scenario, you may still want professional assistance. After all, you probably have a job and a family of your own, and those needs don’t stop to allow you many hours of free time to administer an estate. Or the estate may be complex enough that you don’t feel you have the expertise to properly run the show. Often the will or trust documents will recommend an attorney or professional to help you do what is required of you as a personal representative, executor or trustee. Don’t be afraid of getting that help.

If someone died and was mean enough to leave you in charge of their estate without a plan (no will, no trust, no nothing), or even an insufficient plan, you are then left with the necessity of engaging the judicial system to pass any unplanned property. The judicial process used to move property of the deceased is typically called the probate process, and is, to put it mildly, very technical and locally driven. Jackson County’s Probate Division has dozens of forms on its website, each uniquely designed to fit the probate process as designed in this county to comply with the state statutes. Property to be transferred by the terms of a will must go through probate, as well as any “intestate” property (not subject to any will). Some property will transfer outside probate by the terms of joint ownership, or through another non-probate transfer law and thus will not require the jurisdiction of the Probate Court. Confused yet?

In short, if you are left to manage a will or an intestate estate, the first call should be to an attorney. Once again, you can call the lawyer who is likely mentioned in the will, or you can consult another attorney you trust. Not only can an experienced attorney help you more easily navigate the minefield of forms and rules that will determine how and where the property will pass, not only will they be able to reduce the stress placed on you during an already difficult and traumatic time, but they can ensure that you, as the personal representative, do not incur any risk or liability that may arise from a misstep or mistake you might make on your own.

Losing a loved one is hard enough for most of us to bear. Trying to carry the extra burden of administering their estate alone is more than should be asked of any of us. By wisely engaging professionals, you can remove that extra burden from your shoulders, and focus on the most important things that remain in your life.

An equal protection primer, courtesy of bankruptcy

Originally appears in the Lee's Summit Journal

On Feb. 23 United States Attorney General Eric Holder issued a letter stating that the Department of Justice would no longer defend Section 3 of the Defense of Marriage Act, which was a change in position from all previous Attorneys General since the law’s passage in the Clinton Administration.

Section 3 defines marriage as between a man and woman for the purposes of federal law. The next day, a legally married gay couple in California filed a joint bankruptcy petition, asking the court to jointly discharge their debts. The trustee assigned to administer the case filed a motion to dismiss the case, stating that since under DOMA this marriage was not recognized as legitimate (bankruptcy is a federal law), the couple could not file a joint case, they would have to file two separate bankruptcies.

Earlier this week, the bankruptcy court, in an opinion signed by 20 of the 25 judges, declared DOMA unconstitutional in that it violated the equal protection clause of the constitution by denying this legally married couple the same rights as any other legally married couple.

This case is a small and early skirmish in what is sure to be a long and protracted legal argument that will eventually end up at the Supreme Court.

The battle will not be fought over bankruptcy petitions, but one of the fundamental constitutional questions of the last 100 years: The Equal Protection Clause and its application to new groups of people who suffer discrimination.

The Equal Protection Clause is part of the 14th Amendment to the U.S. Constitution and states that “no state shall...deny to any person within its jurisdiction the equal protection of the laws.”

It has been subsequently interpreted to apply to the federal government. It was created and adopted after the Civil War in part to ensure our country’s commitment to the notion that “all men are created equal.” As courts have interpreted the interaction of law with the Equal Protection Clause, a detailed and complicated analytical process has been developed to help determine what laws are unconstitutionally discriminatory.

To begin with, we must look at who is being discriminated against or affected by the law. Laws that classify by race, national origin or infringe on a fundamental right are examined under what is called “strict scrutiny.” Such a law must be “narrowly tailored” to achieve a “compelling” government interest. It is very hard for a law to survive strict scrutiny analysis.

Laws that classify on the basis of gender and illegitimacy get “intermediate scrutiny” and must be “substantially related” to an “important” government interest and actually further that interest.

This puts the burden on the government proposing the law and the intent of the law should not be discriminatory.

Finally, all other classifications get “rational basis” review, which keeps laws constitutional so long as they are “reasonably related” to a “legitimate” government interest. Most, but not all laws analyzed under rational basis are upheld as passing equal protection muster.

Attorney General Holder declared in his letter that it was the opinion of the Department of Justice that sexual orientation (specifically the right to marry) was the kind of characteristic that was similar enough to gender and race (unchangeable, a political minority and having a history of discrimination) to be reviewed under intermediate scrutiny and that according to their analysis it failed that analysis on all fronts.

The Supreme Court so far has failed to explicitly apply the intermediate scrutiny standard to sexual orientation discrimination, but has used some language in its decisions that indicate the trend is in that direction. The current court has not heard or decided a case in which it has applied equal protection analysis to sexual orientation discrimination and the question is open until they actually speak on the subject.

The battleground on this hot-button issue will be argued in the courts around whether sexual orientation deserves rational basis or intermediate (or even strict) scrutiny. That will turn on how the courts view sexual orientation, whether a characteristic like gender or race, or something not worthy of enhanced intervention.

This guide will hopefully make the following a bit easier to understand.

While star-studded, roots of Dodgers’ bankruptcy familiar

Originally appears in the Lee's Summit Journal

On Monday, the Los Angeles Dodgers Holding Company LLC filed for Chapter 11 Bankruptcy protection in the District of Delaware (I will let the irony of the L.A. Dodgers filing in Delaware wash over you for a moment). With assets listed in excess of $500 million, debts over $1 billion, the famous names at the top of the creditor list (Manny Ramirez, Vin Scully), and the active opposition of Major League Baseball (MLB), it might appear that this bankruptcy has no relevance to the financial struggles of more regular folks. However, the actions that led to the bankruptcy are the same symptoms that lead many of my clients into my office, just written on a much larger financial scale (I don’t handle any billion dollar cases, though I am told the fees are pretty nice).

Last year, the Texas Rangers filed a bankruptcy case, but that one was much different than the Dodgers promises to be. First, the Rangers had already been placed under control of MLB, since its previous owner had defaulted on debts. The Rangers’ bankruptcy was designed to facilitate a quick sale of the team, and even with all the wrangling that followed (such cases are never simple), the entire process took a little over three months. The Dodgers’ filing is designed to prevent such a forced sale by MLB and one of the interesting legal dynamics will be the interaction of MLB’s anti-trust exemption (which gives it tremendous power over the individual teams) and the bankruptcy code’s provisions for self-management and reorganization. The Dodgers’ owner, Frank McCourt, wants the bankruptcy court to force MLB to allow him to sign a TV contract the league had the right to reject, and to accept further financing in violation of MLB rules. The MLB would like to force McCourt to sell the team, and soon, and they have the power to force such a sale if need be (outside a bankruptcy court).

But why are the Dodgers in bankruptcy in the first place? In short (and oversimplified), for two reasons many people are in bankruptcy: Divorce and a failure to adjust lifestyle in the face of changed economic circumstances.

Frank McCourt and his wife Jamie are in the midst of a high-profile divorce, the kind that only seems able to occur in California and on Tabloid Television. Ownership of the team is in dispute in the divorce, which has limited the ability of the Dodgers to field a winning and profitable product. Typically, when a couple divorces, the total living expenses required to support all the family members rise (multiple households), and there isn’t extra income to cover it. For most Americans, who live so close to the edge of their means to start, this means there isn’t enough money left to pay all the creditors, and often one or more of the couple will end up filing a bankruptcy. The McCourts exacerbated this issue by maintaining their lavish lifestyle, including buying two neighboring million dollar homes, in the face of their split, and taking an alleged $100 million out of the Dodgers to use on personal expenses. This “withdrawal” left the Dodgers short on cash for meeting their obligations, and got MLB interested in the financial matters of the team.

While my sympathy for two millionaires fighting for control of a profitable Major League Baseball franchise and refusing to downgrade their lifestyle to just below mind-bogglingly lavish is severely limited (okay, non-existent), the parallels are easy to draw down to those of us who live on planet earth. If you are going through a divorce, it is vital that you examine the financial ramifications of the dissolution. Finances are not a good reason to remain in an unhealthy marriage, but both parties should be able to take a sober look at the realities created by separate households, from extra rent/mortgage payments to added child care costs, insurance and ten other items that if not attended to will invariably lead you to my door. Sometimes, even careful planning won’t avoid a bankruptcy, and a bankruptcy can occasionally make a divorce a bit less painful. But understand that any life change requires with it a life finance adjustment.

What Should I (Not) Do With My Tax Refund?

As published in the Lee's Summit Journal.

Bankruptcy filings run in cycles during the year. The rate of filing slows down during the dog days of summer (I guess more people are on vacation), pick up after Labor Day, slow down over the holidays (who wants to file bankruptcy on Christmas?) and tend to ebb and flow in relatively predictable ways over the calendar.

The first third of the year is one of our busier times, with people tackling their financial troubles as a New Year’s resolution and also one of the times we have to be most careful with the timing of a bankruptcy filing, because of the pending arrival of tax refunds. While most people aren’t filing bankruptcies this spring (I hope), borrowing some of the advice I give to my clients regarding their disposition can be useful to those without great financial distress, or useful to keep that distress at bay.

When a person files a bankruptcy, all of their property (and property rights, with a few exceptions) that they owned as of the date of filing become part of the bankruptcy estate, which is then used as the basis for getting money to creditors.

Debtors (the people filing the bankruptcy) can exempt, usually under state law, certain amounts of value in certain types of property, thus keeping it and protecting it from being used to generate money for creditors. This is how people can file bankruptcy and keep most of their stuff, with a few wrinkles, of course.

Included in this pile of property rights is the right to receive an income tax refund. The prospect of giving up their tax refund is not something that most people enjoy, so often we will delay a bankruptcy filing to allow a client to use the refund wisely and not surrender it to their case.

How they spend the refund is also important and if a debtor has paid the money to the wrong parties, that transaction can be reversed in the bankruptcy case, adding annoyance and expense to the already humbling bankruptcy experience.

While it is unlikely that you will have your tax refund expenditures reversed, spending your refund unwisely can leave you on the road to bankruptcy, or at least make the ride bumpier than it has to be. Some priority tips:

• Start with catching up on any core living expenses, especially your mortgage or car payment. These and your utilities are the foundation of your daily life, so take care of those first if need be.
• Apply some of the money to your debt reduction plan. You do have one of these, right? Reducing or eliminating payments on high-interest debt will create money for you year-round, not just once in the spring, providing that you don’t re-grow the debt later.
• Plan for your upcoming “spike” expenses. Taking a family vacation this summer? Know you need some new tires soon? Setting the money aside now will keep you from financing the purchase later, once again saving you money all year long.
• Save some money for retirement or college. If you are eligible to open a Roth IRA, you can have that money grow tax-free till retirement and perhaps start a good habit along the way. Missouri offers a tax deduction for money contributed to their Education IRA and 529 plans, giving you an incentive to save and a head start on next year’s refund.

These priorities form the basis of almost every financial plan I have ever been exposed to. Cover the basics, develop and execute a debt reduction plan, then save for emergencies, single expenses and retirement/college.

You may have noticed that buying a new flat-screen TV was not on the list above.

While nobody appreciates watching Charlie Sheen melt down on 54 inches of high-definition liquid crystal glory more than I do, I would wait until after I had addressed the above concerns before spoiling myself so thoroughly.

Take care of the other items and there will be time and money for “winning” and tiger blood soon enough.

What Michael Vick means to you and your finances

As published in the Lee's Summit Journal.

Given his recent run of success on the football field, there has been renewed discussion of Michael Vick, his prior actions, the value of second chances, redemption and What It All Means.

This article isn’t about any of those things. Instead, this is about one of the few things Mr. Vick and most of us have in common: money and debt (I am assuming very few of you reading this article have careers in professional sports, millions in assets, or federal felony convictions.)

Michael Vick is in the last year of his playing contract, but is only one year or so into a five year Chapter 11 Bankruptcy Reorganization Plan.

A Chapter 11 has the effect of grouping together creditors and treating them all in a similar manner, allowing for the debtor in the case to continue making income or doing business without lawsuits, garnishments or other collection activity. It is the type of bankruptcy that larger businesses use (think GM, Chrysler, pick an airline), as well as individuals with many assets and large debts (Mike Tyson, Vick). This plan requires him to pay some of his income into a “Liquidating Trust” that then pays out money to his creditors. In structure it is fundamentally similar to a Chapter 13 Bankruptcy, for which most consumer debtors (people like you and me) would be eligible.

In a Chapter 13 Bankruptcy, a person (or couple) makes payments to a Chapter 13 Trustee, and the money is then paid out to their creditors according to the terms of the bankruptcy plan. If the debtor’s income changes, whether an increase or decrease, the terms of repayment may also have to change – if you make more, you pay more to your creditors; if you make less, you pay less (within certain limits).

I was curious what provisions Mr. Vick’s plan made for his future contracts, and how, if at all, it would change based on what he made. It turns out his plan is well thought out on this front (those millions in legal fees haven’t gone to waste), and provides for an increasing percentage of income to be paid to creditors as his income increases (much like how your taxes are calculated), maxing out at 40 percent of all income over $10 million per year is to be paid until the end of 2014, or 100 percent of claims are paid.

There are some provisions to ensure extra income is paid if he hasn’t met 80 percent of the claims by 2014. Since Chapter 11 cases essentially end when the plan is confirmed by the court and not when payments are completed, it must include some provision to account for changes in income. By contrast, Chapter 13 cases don’t end until the last payment is made, and are thus reviewable by the court in the event of a change in circumstance.

In both cases, there is provision in place to adjust how creditors are treated in the event the financial situation changes for the individual. When dealing with your creditors (hopefully outside the confines of a bankruptcy), you need a plan that does the same.

First, you should have a plan in place to reduce or eliminate your consumer debts (credit cards, medical bills and the like), making sure the plan categorizes and prioritizes the debts (there are many methods, like Dave Ramsey’s or Suze Orman’s.) Second, you need to be willing to reexamine the plan when your situation changes, perhaps after your annual pay review, or in the event of a child being born or going to college, making changes to account for your current economic reality. Finally, and most importantly, you need to have the will to stick to the plan, even when it ceases to be fun.

It took a felony conviction, complete public disgrace, and a Chapter 11 bankruptcy to get Michael Vick on sound financial footing with a plan for recovery.

If you start with a plan to manage and eliminate debt, you can hopefully avoid a similar financial fate. Feel free to skip the felony and disgrace parts as well.