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I had coffee with a great friend of mine who began his own bankruptcy practice a few years ago.  He explained that he recently acquired a very difficult case involving a debtor with a high paying job and he expected a brutal Chapter 13 confirmation process—i.e, he expected the Trustee to demand a significant monthly payment.  Apparently the debtor had bad luck in a business venture and was now deep in SBA loan debt requiring a bankruptcy despite his job that paid a six-figure salary.  As I continued to question my friend about the nature of his client’s debt, it became clear that the majority of his debt came from the business failure.  The good news for my friend and his client is that there would be no brutal Chapter 13 confirmation hearing.  In fact, there would not even be a Chapter 13 case at all.
One of the greatest loopholes in bankruptcy law allows debtors with high income to qualify for the speedy Chapter 7 discharge even though it is obvious that they have the financial ability to repay some or all of their debt.  Generally speaking, if a debtor has the ability to repay some or all of his debt, then Chapter 7 is not allowed and a debtor must commit to repaying a portion of the debt in a 3 to 5 year Chapter 13 payment plan.  However, if a majority of the debt is not consumer debt a person is allowed to file Chapter 7 regardless of their income or ability to repay debt. 
Bankruptcy Code section 707(b) provides the general rule:
"After notice and a hearing, the court, on its own motion or on a motion by the United States trustee, trustee (or bankruptcy administrator, if any), or any party in interest, may dismiss a case filed by an individual debtor under this chapter whose debts are primarily consumer debts, or, with the debtor’s consent, convert such a case to a case under chapter 11 or 13 of this title, if it finds that the granting of relief would be an abuse of the provisions of this chapter."
Omaha millionaire Ted Baer was allowed to complete a Chapter 7 case despite objections filed by a creditor and a monthly budget that allowed $4,580 for retirement savings, $2,000 of food expenses and $1,500 per month for vehicle payments on monthly income of $20,065.  Why?  Because most of his debts were business related.
In the case of Dr. Steven Lapke, (Case number 07-81140) the Nebraska Bankruptcy court stated the following:
"For purposes of § 707(b), a debtor’s debts are primarily consumer debts if more than half of the dollar amount owed is on consumer debts. In re Coleman, 231 B.R. 760, 761 (Bankr. D. Neb.1999); In re Shelley, 231 B.R. 317, 319 (Bankr. D. Neb. 1999); accord Price v. U.S. Trustee (In rePrice), 353 F.3d 1135, 1139 (9th Cir. 2004); In re Booth, 858 F.2d 1051, 1055 (5th Cir. 1988); In re Beacher, 358 B.R. 917, 920 (Bankr. S.D. Tex. 2007); In re Snyder, 332 B.R. 641, 643 (Bankr.M.D. Fla. 2005); In re Praleikas, 248 B.R. 140, 144 (Bankr. W.D. Mo. 2000). This calculation is to be made as of the date of bankruptcy filing. In re Penny, 297 B.R. 737, 739 (Bankr. C.D. Ill. 2003)."
Debts normally classified as “consumer” debts include credit card debt, medical bills, student loans, home mortgages and auto loans.
Bankruptcy attorneys frequently assume the nonconsumer debt exception only applies to business debts, however it also includes tax debts, personal injury claims and other tort debts.  If credit cards were used primarily to fund business operations, that too may be deemed a nonconsumer business debt.  Some debtors have argued that student loan debts are not consumer debts but have received little success. 
If the majority of debts are not consumer debts, it is important that the bankruptcy schedules reflect this fact.  The list of debts in such a case should specifically state whether each debt is a consumer or nonconsumer debt, and it is helpful to provide the U.S. Trustee with a worksheet that totals each type of debt.

Sad news out of London today. The 10 year old Belgian stallion named London, ridden by Gerco Schroeder in the 2012 Olympics, and which took the silver in both team and individual show jumping has been seized due to bankruptcy proceedings by the owners. The horse, along with other horses owned by the same company was seized shortly after the conclusion of the jumping competition. 
http://www.examiner.com/article/silver-medal-winning-olympics-horse-seized

Of course the bankruptcy trustee was hoping that “London” won gold instead of silver.  More for the estate creditors I am sure. 

You can absolutely keep your 401k if you file bankruptcy in Atlanta, Georgia.  This is one of the most common questions I receive when clients schedule an appointment with me. Many people thing that the bankruptcy court (or more appropriately, the trustee assigned to your case) will liquidate all your assets under a Chapter 7 bankruptcy.  This is simply not the case.  Georgia has specific laws that protect certain assets of the debtor from being taken by the Chapter 7 trustee or creditors.
For instance, under Georgia bankruptcy law (specifically, the Georgia law specific to exempt property in bankruptcy), the Debtor may shield from creditors up to $23,500 of equity in his or her personal residence, $3,500 in a car, and $5,000 in household goods, among other things.
When it comes to 401k retirement plans, you may exempt the entire amount of the holdings in your 401k.  This is one of the most debtor friendly laws in the state of Georgia.  It just makes sense. How can you expect someone to get back on their feet if their retirement is up for grabs by creditors?
Section 44-13-100 of the Georgia Code states,
“Exemptions for purposes of bankruptcy and intestate insolvent estates
(a) In lieu of the exemption provided in Code Section 44-13-1, any debtor who is a natural person may exempt, pursuant to this article, for purposes of bankruptcy, the following property: ”
(2.1) The debtor’s aggregate interest in any funds or property held on behalf of the debtor, and not yet distributed to the debtor, under any retirement or pension plan or system:
(A) Which is: (i) maintained for public officers or employees or both by the State of Georgia or a political subdivision of the State of Georgia or both; and (ii) financially supported in whole or in part by public funds of the State of Georgia or a political subdivision of the State of Georgia or both;
(B) Which is: (i) maintained by a nonprofit corporation which is qualified as an exempt organization under Code Section 48-7-25 for its officers or employees or both; and (ii) financially supported in whole or in part by funds of the nonprofit corporation;
(C) To the extent permitted by the bankruptcy laws of the United States similar benefits from the private sector of such debtor shall be entitled to the same treatment as those specified in subparagraphs (A) and (B) of this paragraph,
provided that the exempt or nonexempt status of periodic payments from such a retirement or pension plan or system shall be as provided under subparagraph (E) of paragraph (2) of this subsection; or
(D) An individual retirement account within the meaning of Title 26 U.S.C. Section 408.
The above statute appears confusing, but it stand for the proposition that all undistributed funds held in a 401k retirement plan are exempt from creditor collection action.
But here’s another wrinkle that bodes well for debtors.  Your 401k funds may not even be property of the bankruptcy estate. To explain, when you file bankruptcy, all your property becomes property of the newly created bankruptcy estate to be administered and liquidated by the Chapter 7 trustee appointed to your case.  However, the Supreme Court has held that retirement plans with an enforceable anti-alienation clause, which is a provision that prevents creditors from garnishing retirement funds of the debtor, are not property of the estate.  This means that the trustee has no power over those funds.  Virtually all 401k savings plans that are qualified under ERISA (Employee Retirement Income Security Act) have an anti-alienation clause.
 

By now, many have heard the news that well-known former baseball player Jose Canseco recently filed for bankruptcy, mainly to deal with back taxes. What many have not seen, however, is the screed he published on the website, Vice.Com, and titled: "Jose Can Say So - I'm Broke and It's the Government's Fault."

Undoubtedly he intended it as a tirade against the government. But interestingly it also serves very well as a testimonial to the dangers of tax debt I have written about in the website of our DC-based tax and bankruptcy law firm. Some excerpts from his harangue and my comments:

" . . . [I]t's my duty to warn you: It can happen to anyone.

When you owe the government--whether it be state or federal--they are relentless when it comes to getting their money back. They institute incredible penalties and interest that almost makes it seem like they want to enslave you."

I have compared owing taxes to having a financial cancer - particularly because the debt grows at an alarming rate -- on the order of about 25% a year, due to penalties added on top of interest. Every month somebody comes to my office complaining that they had been in a payment plan with IRS (known as an "installment agreement") and "it has not gone down!" The reason is, invariably, that the small monthly payment they are making is not nearly enough to pay the interest and penalties that are accruing, let alone the tax (which is the principal, in this case).

Canseco does a good job in describing what it feels like when a person is literally drowning in tax debt:

"Recovering from something like that is very difficult. It's like swimming in the ocean. Once you get out past 100 yards, it looks like 200 yards and the farther you swim the harder it is to get back to shore; you're just swimming around forever and you can never reach the other side. The vastness just keeps expanding and expanding and expanding, by which I mean penalties and interest. Obviously, I've got issues from the past, but it just becomes so overwhelming that you're not even swimming anymore. You're just underwater, sipping air--sipping life even--through a little straw that's sticking through the surface. It's the most frustrating, unnatural thing I've ever had to go through--constantly being suffocated, choked out, and wondering if I could survive until the next day to make more payments on whatever I could."

Pretty good image huh? And he's not bad on describing the consequences either:

"For the last five or six or seven years I've just been trying to, well... live. I've been evicted from homes, lived in friends' converted garages, and bounced from house to house. Putting money into my account became a terrifying activity because there was a good chance the government would immediately confiscate it."

That's true. That's what happens. The tax debtor starts having to live an underground existence. It's pretty much living in the Third World with no bank account, no ATM, no credit, no nothing.

"Things got to the point where even my daughter Josie--her last name is Canseco--was drained one time. I think she said that they returned it, but anything relating to the Canseco last name became a nightmare. Let me tell you from first-hand experience, the IRS are a bunch of thirsty piranhas. They bled me dry."

True again. Even though the tax liability is legally only that of the debtor's, this type of problem will have an impact on your relationships, in a bad way. I'm sure his daughter is not happy with him, looking up to Daddy, and ready to blow him a lot of kisses. Think about what it will do to your marriage when your partner's account is also wiped out, even if only temporarily, or you can't contribute to the mortgage because your wages and bank account have been seized. It does not win friends.

"The issue is very simple: If you've got friends and family, the more money you make the more you spend on them. So let's say you spend half your money on them and the rest on yourself and the cost of living. It may so happen that during all of that you forget to pay your taxes. And then all of a sudden penalties and interest start to add up, and you're in a pool of quicksand from which you cannot escape."

Here, unfortunately, Canseco goes off into a justification and excuse for his actions. I won't comment on the merits of his arguments. You can read them for yourself. But saying that he "forgot" to pay taxes is an excuse right up there with "my puppy chewed up my homework" from grade school days. He may be able to handle a fastball, but he'll never get this past a judge.

A case like his will present some significant legal issues. According to news reports, the back taxes, which make up the bulk of his total debt, are more than $500,000. The key question is how much of that is non-dischargeable tax debt? I trust his bankruptcy attorney made a detailed analysis before filing and discussed the issues thoroughly with him, like we do in our bankruptcy and tax law firm for our clients in DC, Virginia and Maryland.

If it's not dischargeable, Chapter 7 bankruptcy, which is what he filed, will not help him much. The tax debt will still be there when he finishes. Reorganization bankruptcy could give him the right to pay it back interest-free over time, but given his total debt of $1.69 million, he probably would have to file an individual Chapter 11. Chapter 11 for individuals in DC, Virginia and Maryland is always an option to consider and provides powerful relief, but is complicated, expensive, and at this point in time, changing as judge-made case law defines the new bankruptcy law that went into effect in 2005. Consult only an experienced bankruptcy lawyer.

Finally, given who he is, and the potential revenue streams he has available to him as a celebrity from intellectual property (endorsements, copyrights, etc.) that he could generate, I easily see a lot of objections from his creditors, the US Trustee, the US Attorney, and the Chapter trustee if he tries to walk away from this debt without a financial contribution of some sort.

Unlike a bankruptcy for the average person, this one should be a whole new ballgame.

Good luck, slugger.

For the rest of you, if you have questions, give our tax and bankruptcy firm a call.