| Spring, 1997
Bankruptcy Alert: Private IRA’s In a Third Circuit Court of Appeals (Federal Court) decision that I have predicted for some time, the Court has held that bankrupts can keep their entire private IRA funds. The Court found to hold otherwise would discriminate against the self-employed, who often fund their pension programs through such devices, including SEP’s and Keogh plans. The law has always protected public employee and corporate ERISA plans. Previous law restricted the amount of private IRA funds protectible to the amount reasonably necessary for later support, and often subjected portions of such savings to seizure by the Trustee (which is still the law in California). The present holding, which is being duplicated by other courts represents a watershed decision. What is the significance? First, never not contribute to your IRA. Second, try not to use IRA distributions to reduce overwhelming, burdensome debt, and incur additional nondischargeable tax liability without first obtaining a legal consultation. "Sometimes it’s better to be a live dog than a dead lion." Jeff
Daniels from the movie
Prop 213: Update Proposition 213 continues to wreak the havoc in auto liability cases originally predicted. Multiple lawsuits statewide have been filed challenging several aspects of the legislation. One year post passage, the practical effect will be monumental. Some court analysts are predicting a 25% decrease in insurance claims, and perhaps even greater numbers in terms of lawsuits filed. Many unfair aspects remain unresolved. A case in point is the interplay of the drinking driver portion of the statute and uninsured motorist coverage. Another case in point is injuries to minors in vehicles where coverage is not available to the parent or owner. Over time, I expect to see modifications in the statute, but continue to predict the change is here to stay. Therefore, let me reemphasize, the cost of being uninsured, like driving intoxicated, has simply become too high. Make certain that you stay current with your policies, and include in that coverage uninsured motorist liability coverage. Bankruptcy Alert 2: Divorce Debt When can an ex-spouse get out of paying a "property settlement" from a divorce by going bankrupt? This is an issue I promised you that I would continue to follow since the law changed in October of 1994, making it more difficult to do. There are now 50 cases (31 more than when I last reported) dealing with the issue. The consensus seems to be that the new law is a mess. The law says that a divorce-related debt can be discharged if one of two tests is met: 1/ The debtor doesn’t have the ability to pay, or, 2/ A discharge would benefit the debtor more that it would be a detriment to the ex-spouse. A debtor is able to pay the debt if he or she has enough income and property beyond what is reasonably necessary for living or business expenses. The test used in Chapter 13 cases for "disposable income" is used. But the cases are in turmoil as to "when" (at trial, upon filing?) this test should apply. Courts will consider what a debtor is capable of making—-some as few as 3 years, others as much as ten years. Nine courts have factored in the income of a new spouse of the debtor. One court has even factored in the income of a live-in girlfriend of the debtor. Exempt assets, however, generally remain exempt in the calculation. In the benefit v. detriment test, the courts have looked to see who is poorer. If the debtor is poorer, the debt is discharged in bankruptcy, and vice versa. Most courts are now saying that if the debtor can pay the divorce obligation, and the relative position of the parties is equal, then the debt must be paid. That is because the test states the debt is non-dischargeable unless the benefit outweighs the detriment to the ex-spouse. The burden to prove all this is on the debtor. The statute is being applied to all debts other than for alimony, maintenance and support—which remain nondischargeable.. Typically, these debts arise in property settlements through notes, promises to pay of a debt of the spouse or community, attorney fees, credit card balances or mortgages. Finally, procedurally, if one is to challenge a bankruptcy on the basis the debt listed by the debtor is nondischargeable under the new statute, a complaint to determine dischargeability must be filed in Bankruptcy court within 60 days of the first meeting of creditors—the 341(a) hearing. Big firmin':Hookum, Snookum, & Crookum Recently, an attorney and law professor in Ohio did a study and wrote an article about the recent fee request submitted by the lawyers involved in the notorious "Texaco" boardroom discrimination case. The fee request was for 29 million dollars. 29 million. This worked out to 72,500 hours at the given billing rate of $400 per hour. That is one lawyer working approximately 37 years on one case. Or, that is ten lawyers working nearly four years at New York City legal rates on nothing but the case at hand. The case was settled within 3 months of inception, for the Texaco offer of $115 million. In my humble opinion, the consuming public deserves better—-which is
exactly why the consuming public needs to be able to make better choices
about the delivery of legal services
Medicaid/MediCal: New Rules on Transfers Medicaid (MediCal) eligibility is based on need—limited income and ownership of modest assets. Due to the heavy expense of medical care, hospitals and long term nursing care, people sometimes confronted with such costs are often tempted to "artificially" create eligibility by transferring assets to relatives or into trust. Over the years, Congress has passed numerous laws stopping such practices. Under the new law, transfers that do not create ineligibility (those made in excess of the three year look-back period for outright gifts, and in excess of five years for transfers in trust) are still lawful. However, in the Health Insurance Portability And Accountability Act of 1996, the law now imposes federal misdemeanor liabilities including fines of $10,000 and up to one year in jail in certain circumstances on persons who make asset dispositions to create eligibility. Other criminal penalties attach to counseling or facilitating such bogus transfers, including felony liability. The point I wish to caution here is that one facing immediate decisions such as MediCal eligibility is most likely not in the proper position to be transferring assets. If one is interested in long term planning for this purpose, then there are specialists in estate planning that can provide lawful and reasonable solutions. The law is quite clear, with more and more criminal penalties being attached, that the hurdles to eligibility are barriers that cannot be instantaneously avoided. Have a pleasant Easter!
Gerald Spala
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