The Game of Life

The Game of Life was one of my favorites growing up. I always prayed to land on the best profession and get the biggest house.  I also remember that you could purchase different kinds of insurance: fire, home, auto, or life.  While having the big house is great, having the insurance to protect what's important to you is even better, right?

Well, it seems that if the Game of Life happens to bring you to bankruptcy court in Arizona, you may soon be playing the Game of Life Insurance. In this game, that life insurance policy that you probably did not value when playing a game as a kid, but hold dear as an adult, is also highly coveted by your bankruptcy trustee. We are going back to our favorite Arizona exemptions here.  Remember, when you file Chapter 7 bankruptcy, you can exempt certain assets from your bankruptcy estate and your creditors. Arizona statutes allow for protection of insurance proceeds where the policy has been held for two years and  has named as the beneficiary a spouse, child, parent brother, sister, or any other dependent family member (A.R.S. Section 33-1126). 

Last year, two trustees in Tucson challenged the exemption of benefits where adult children were named as the debtors' beneficiaries.  The trustees contended that the beneficiary must be a dependent child in order to exempt the proceeds from the bankruptcy estate. Unfortunately, a bankruptcy appellate panel agreed with them. If you read the opinion a lot of the decision comes down to sentence construction and what the phrase "any other" is modifying. I know its crazy to think that a legal issue might be decided based upon sentence structure, but, in the absence of other court decisions, it can often happen that way.

So, what do the players in The Game of Life Insurance do?  It's hard to say. The decision is supposedly on appeal, so it is not hard and fast law. Which means, you may get a trustee who does not view the proceeds in the same way and will not pursue them.  Whatever the case, it is important that, as a debtor, you mention the existence of life insurance policies to your bankruptcy lawyer. Especially if you have whole life insurance policies (which carry cash surrender value) and have adult children as your beneficiaries. In this case, you may want to cash out the policies prior to filing and live off the proceeds. Of course, you also want to be careful of being a bankruptcy hog (see pigs vs. hogs below).

This blog is for informational purposes only and is not to be construed as legal advice. 
More information about Perez Law Group can be found on our website, www.perezlawgroup.com.

Pigs and Hogs in Bankruptcy

What do pigs and hogs have to do with consumer bankruptcy? They can be potentially liquid "assets" in a Chapter 7, but in this instance they are acting as a symbols for Chapter 7 debtors.  Because Chapter 7 is a liquidation bankruptcy, protecting assets becomes very important.  That is where the pigs (those Debtors that want to intelligently, but reasonably protect assets) and the hogs (those that greedily hoard their assets from the trustees) come in. 

Recently, there has been concern that Debtors are being more hog-like than pig-like and that they are being assisted by their attorneys in doing so.  Usually, bankruptcy attorneys refer to the strategic protection of assets as pre-bankruptcy planning. At times this means your attorney will identify what assets are non-exempt (for example, stocks in Arizona) and suggest that cash out your stock and use it to live off of or for other necessary expenditures.  A necessary expenditure may even be the purchase of an exempt vehicle or other exempt item that you need. The question becomes is pre-bankruptcy planning just good strategy or is it being so greedy that the act becomes fraudulent?

In 2002, the Arizona bankruptcy court heard a case concerning questionable pre-bankruptcy planning. This case is still considered good law despite having occurred before the bankruptcy law changes in 2005.  In In re Crater, 286 B.R. 756, , Judge Haines determined exemption,or pre-bankruptcy, planning, alone, is not enough to show that a Debtor may have intended to "hinder, delay, or defraud" his/her creditors.  In this case, the Debtors cashed out $40,000.00 of stock and used the funds to pay toward there second mortgage, which increased the equity in their home, but not beyond the allowable homestead exemption.  This was done just months before their bankruptcy was filed.  Judge Haines stated that there must be something in addition to the timing of an act to demonstrate an improper purpose. For example, concealment of the act on the bankruptcy paperwork (i.e. not disclosing the sale of stock as a transfer), transfer of property to a friend or family member, or providing an explanation for the transfer that demonstrates lack of honesty or credibility.

For those of you thinking about filing Chapter 7, I think this opinion is very significant. While, Judge Haines determined that the converting of a non-exempt asset to an exempt asset is not, on its face, fraudulent, he did not say that this will always be the case.  A frequent occurrence for bankruptcy attorneys is that we get a client in our office for an initial consultation who has all the "what ifs" down. "What if I take all of the money out of my bank account and hide it under the mattress?" or "What if I take this asset and move it here or put that asset there?" My response is, "why would you be a hog when you only need to be a pig?"  Pre-bankruptcy planning is important because we do not want our clients to lose everything, especially if there are options and ways to safely protect them.  We have to advocate for our clients.  But Chapter 7 debtors should be weary of getting too greedy and too creative. The issue in the Crater case was whether the Debtors should be denied their discharge.  This is what Chapter 7 debtors want most of all, and we should be careful that the right to receive the bankruptcy discharge is not lost because of hog-like behavior.

This blog is for informational purposes only and is not to be construed as legal advice. 
More information about Perez Law Group can be found on our website, www.perezlawgroup.com.

Commissions and Chapter 7 Bankruptcy

As I have said before, "even the simple Chapter 7 bankruptcy can turn out to be not so simple." For example, you are a married couple wanting to file bankruptcy with a below median income, partly consisting of social security income.  You have the normal assets: house, car, clothes, wedding rings, but no "toys" like boats or RVs. Should be easy, right? Should be, but things can get complicated quick. Let's say that you, the husband, are a real estate agent, and your income is derived from insurance contracts and commissions off of those contracts. And that right there is where things get ugly.

The issue in this "simple" bankruptcy is that when a Chapter 7 is filed, a bankruptcy estate is automatically created, which includes all of your legal and equitable interests in property 11 U.S.C Sec. 541(a)(1). This includes your rights under a contract created prior to filing bankruptcy and any contingent interests. So, if you're an insurance agent that has already existing contracts, your Chapter 7 trustee will be able to step right into your shoes and take over those contract rights, including the right to receive commissions.

So, what do you do? Are you out of luck? Not quite. However, a lot depends on what jurisdiction you have filed in and also the demeanor and mindset of the trustee assigned to your case. First, your lawyer should take a look at whether any of the commissions are due to your post-petition work and services rendered.  This may be difficult if it is a renewal commission for which little effort is expended in getting clients to renew. Earnings from work started and completed post-filing are not property of the bankruptcy estate. Additionally, the Arizona bankruptcy court has determined that commissions are the same as other earnings and are also subject to the "75% of earned, but unpaid wage" exemption.  This means that if you have completed work prior to filing bankruptcy, but will not get paid until after filing, you can protect up to 75% of those earnings. If you're the insurance agent in this example, you can attempt to protect 75% of the commissions earned from pre-filing work as your unpaid wage.

I think the lesson of this story is that bankruptcy can be a complicated area of law with many unforeseen issues and surprises. Because of that, anyone who is considering filing on their own should maybe think again or, at the very least, consult with an experienced attorney to determine if the case is more complex than it looks.

This blog is for informational purposes only and is not to be construed as legal advice. 
More information about Perez Law Group can be found on our website, www.perezlawgroup.com.