1. Identify Assets and Liabilities

1. An inventory of all assets titled in the name of the individual and all assets held jointly with a spouse or anyone else.
2. The value of each of the assets held individually and jointly.
3. The identification and valuation of any assets likely to be acquired in the future such as inheritances, trust, retirement, etc.
4. A listing of all liabilities be they unsecured, secured, contingent or unliquidated.

Valuations may be tricky because there are many false indicators (such as low real estate and personal property tax assessments) and because value changes from day to day. In a volatile market, values can double in a few months as experienced in the prior D.C. residential real estate market. Similarly, values can decrease overnight as we often see in the commodity and stock markets.

As with estate planning and IRS concerns, the best way to determine valuation is from a qualified appraiser. One whose testimony has been accepted in the past by courts and the IRS is best. Even if the values change, this gives you a good starting point for your analysis and planning.

Note: Getting banks and security companies to create tenancy by the entirety accounts is often a problem. The resistance is incredible but you can prevail. At the very least, the account should read "John Doe and Jane Doe a married couple as husband and wife with rights of survivorship."

Remember that under the federal bankruptcy exemption a tenancy by the entirety property is part of the bankruptcy estate and may be partitioned despite the state cases and statutes (11 U.S.C. § 541(a)(2)(B)). Even if the bankrupt debtor choose only the state exemptions and not the federal bankruptcy exemptions any debts of joint creditors listed on the spouses bankruptcy schedules will permit a bankruptcy Trustee to liquidate tenancy by the entirety property. This is true in the 4th Circuit as established by Sumy v. Schlossberg, 777 F.2d 921 (4th Cir. 1985). While the U.S. Court of Appeals for the District of Columbia Circuit has not spoken on the issue, the concept is upheld in the majority of jurisdictions where tenancy by the entirety property exists and it is likely to be upheld by the District of Columbia Circuit.

Because of this problem, a bankruptcy debtor and his/her spouse should attempt to pay off all joint debts before filing bankruptcy or be prepared to pay the Trustee or watch the Trustee liquidate joint tenancy by the entirety property.

4. Converting Nonexempt Assets Into Exempt Property

We all have heard of the failing businessperson that liquidates their assets, purchases an expensive residence in Florida where a residence is completely exempt from creditors, and then declares bankruptcy in Florida. Similarly, you may place assets in protected accounts such as ERISA qualified retirement plans, tenancy by the entirety property and specific exempt properties as long as you respect the pig v. hog rule. The excessive conversion of non-exempt assets raises a red flag and may be undone and otherwise sanctioned as fraud, fraudulent conveyance or a denial of the entire discharge under §727(a)(2). Discretion here is the better part of valor.

NOTE: That the new bankruuptcy code requires that for some state exemptions the debtor be domiciled in the state for 730 days prior to the date of filing (or, if not located in a single state within the 730 days, the 180 days prior to the 730 day period). Also, § 522(p) limits homestead exemptions to $136,875 for a residence not held 1215 days precedingthe date of filing. Exemption value of property is also reduced under § 522(o) if the debtor engaged in any fraudulent transfer within ten years of filing by the amount of the fraudulent transfer.

On November 19, 2000 a new exemption statute was passed by the D.C. Council and became law on June 24, 2000 as D.C. Code § 15-501. The new law basically tracts the Bankruptcy Code exemption statute, 11 U.S.C. § 522(d) without the indexing factor; with a much more generous homestead exemption for the residence of the debtor; and, for any recovery by tort victims. (It also contains a full IRA exemption.)

The new law will provide the following exemption for District of Columbia residents:

1. $2,575 for a motor vehicle
2. $425 per item or $8,625 total for household furnishings, household goods, wearing apparel, appliances, books, animals, crops, or musical instruments
3. $850 for any property plus up to $8,075 for any unused amount of exemption under paragraph 2.
4. $1,625 total for implements, professional books, or tools of the trade.
5. Any unmatured life insurance contract owned by debtor other than a credit life insurance contract.
6. Professionally prescribed health aids.
7. The debtor’s right to receive benefits for: (a) social security, (b) veterans, (c) disability, illness or unemployment, (d) alimony, support, or separate maintenance, (e) payment under stock bonus, pension, profit-sharing, annuity or similar plan or contract on account of illness, disability, death, age, or length of service to the extent reasonably necessary for support of debtor or dependent unless: (1) the plan or contract was established by or under the auspices of an insider that employed debtor at the time the debtor’s rights under such plan or contract arose; (2) payment is on account of age or length of service; and (3) such plan or contract does not qualify under section 401(a) or 403(b) of the Internal Revenue Code of 1986.
8. Debtor’s right to receive property that is traceable to: (a) an award under a crime victim’s reparation law; (b) a payment on account of the wrongful death of an individual of whom the debtor was a dependant, to the extent reasonably necessary for support of debtor or dependent, (c) payment under a life insurance contract that insured the life of an individual of whom the debtor was a dependant on the date of such individual’s death, to the extent reasonably necessary for support of debtor or dependent, (d) a payment, including pain and suffering or compensation for actual pecuniary loss, of the debtor or dependant, (footnote1) and, (e) a payment in compensation of loss of future earnings of the debtor or an individual of whom the debtor is or was a dependant, to the extent reasonably necessary for support of debtor or dependent.
9. Provisions for three months support, whether provided or growing.
10. The library, office furniture, and implements of a professional person or artist, not exceeding $300 in value.
11. The debtor’s aggregate interest in real property used as the residence of the debtor or property that the debtor or dependant in a cooperative that owns property that the debtor or dependant uses as a residence or in a burial plot for debtor or dependant. (footnote2)
12. Any money or other assets payable to participant or beneficiary from, or any interest of any participant or beneficiary in, a retirement plan qualified under § 401(a), § 403(a), § 403(b), § 408, § 408A, § 414(d) or § 414(e) of the U.S. Internal Revenue Code of 1986, as amended or § 409 of the U.S. Internal Revenue Code of 1954, as amended, shall be exempt from all claims of the creditors of the beneficiary or participant except: (a) an alternate payee under a qualified domestic relations order, as defined in § 414(p) of the U.S. Internal Revenue Code of 1986, as amended, and (b) a retirement plan, qualified under § 401(a) of the U.S. Internal Revenue Code of 1986, as amended, as a creditor of an individual retirement account qualified under § 408 of the U.S. Internal Revenue Code, as amended.

    The interest of an alternate payee shall be exempt from any an all claims of any creditor of the alternate payee.

If a contribution to an allowed retirement plan exceeds the amount deductible, or in the case of contribution under § 408A of the U.S. Internal Revenue Code of 1986, as amended, the maximum contribution allowed exceeds the amount deductible and any earnings accrued on such portion, are not exempt under this chapter.

The following assets of a debtor are exempt from creditors in Maryland:

1. $6,000 total in unrestricted exemptions but subject to certain liens. (Md. Code Ann. [Cts. & Jud. Proc.], § 11-504 and 507)
2. (b)(1) $5,000 total for clothing, books, tools, instruments and appliances necessary for any trade or profession (Md. Code Ann. [Cts. & Jud. Proc.], § 11-504(b)(1))
   (b)(2) Money payable for sickness, accident, injury, or death of any person
   (b)(3) All health aids
   (b)(4) $1,000 in goods held for family or household use
3. Most pensions and retirement benefits including the Individual Retirement Accounts (Md. Code Ann. [Cts. & Jud. Proc.], § 11-504(h))
4. $5,000 in any real or personal property, in addition to any other exemptions (Md. Code Ann. [Cts. & Jud. Proc.], § 11-504(f))
5. Life Insurance proceeds and annuity contracts unless dividends received in cash. (Md. Code Ann. [Ins.] § 16-111)
6. Unemployment Compensation
7. Worker’s Compensation
8. Public Assistance
9. A partner’s interest in partnership property per the Uniform Partnership Act (Md. Code Ann. [Corp. & Ass’ns.], § 9-502)
10. Tenancy by the Entirety Property unless both tenants are liable on debt. Sumy v. Schlossberg, 777 F.2d 921 (4th Cir. 1985)
11. Pensions of State Employees (Md. Code Ann. [Pers. & Pens.] § 21-502)

The following assets of a debtor are exempt from creditors in Virginia:

1. $5,000 in any property plus $500 for each dependent subject to certain liens. (Va. Code Ann. §§ 34-4 and 18)
2. a) $5,000 in personal or real property plus $500 for each dependant of a householder or a head of family.
   b) Family bible, wedding and engagement rings, family portraits and heirlooms not to exceed $5,000.
   c) All wearing apparel not to exceed $1,000.
   d) All household furnishings not to exceed $5,000.
   e) All pets, prescribed health aids, and growing crops.
   (Va. Code Ann. §§ 34-4, 18, 26 & 27)
3. Trade Implements up to $10,000 (Va. Code Ann. §§ 34-26 and 27)
4. Motor vehicle up to $2,000 unless exempt as a trade implement. (Va. Code Ann. § 34-26)
5. Claims for negligence and tortious conduct are fully exempt. (Va. Code Ann. § 34-28.1)
6. Certain insurance benefits accident and sickness, group life proceeds, industrial sick benefits, cooperative non-profit life benefits.
7. Pensions and retirement benefits of certain public employees are exempt and others are partially exempt. The Individual Retirement Account, not protected by the ERISA anti-alienation statute, is only partially exempt by a formula dependent upon the total sum and age. (Va. Code Ann. §§ 34-34, 51.1-124.4A)
8. All military equipment. (Va. Code Ann. § 44-96)
9. Public assistance. (Va. Code Ann. § 63.1-88)
10. Unemployment Compensation (Va. Code Ann. § 60.2-600)
11. Worker’s Compensation. (Va. Code Ann. § 65.1-82)
12. Tenancy By the Entirety unless both tenants are liable on the debt. (Ragsdale v. Genesco, Inc., 674 F.2d 277 (4th Cir. 1982))

1. Opt Out Provision

Because all of the states have remarkably different exemption laws, the Bankruptcy Code exemption section could only gain political acceptance if each state was given the right to opt out of the federal bankruptcy exemptions. In this region, Virginia and Maryland have opted out and only their state exemptions may be used by a debtor in those states except when specifically affected by the federal bankruptcy laws (as with the holding period and dollar limitation for a personal residence.). In D.C., there was no opt out and so a local debtor may use either the local exemption law or the federal bankruptcy laws.

Because the federal bankruptcy exemptions were so much more generous prior to D.C. Code § 15-501, most debtors in D.C. chose to use the federal exemptions unless they were trying to protect tenancy by the entirety property with equity. The reason being that a bankruptcy trustee may partition tenancy by the entirety property as part of the bankruptcy estate (11 U.S.C. § 341(a)(2)(B)) if the bankruptcy exemptions are used. But the Trustee may not partition the tenancy by the entirety asset if the D.C. exemptions are used. However, it is believed that the Trustee may still liquidate tenancy by the entirety property for the benefit of creditors of both spouses whichever exemption law is used.

With the new District of Columbia exemption law, it is likely that most debtors will only use the D.C. exemptions in the future. The main advantages are:

a) All of the equity of a residence is exempt if the property was owned for more than 1215 days prior to filing.
b) The Individual Retirement Account is exempt.
c) All recovery for tort and negligence claims are exempt.
d) Most of the other exemption elements of the Bankruptcy Code are now also in the D.C. law although the amounts are not indexed.

The Bankruptcy Code provides for the following exemptions as of 2008. The actual amounts are indexed and will change from year to year (footnote3):

1. The debtor’s aggregate interest, not to exceed $20,200 in value, in real property or personal property that the debtor or a dependent of the debtor uses as a residence, in a cooperative that owns property that the debtor or a dependent of the debtor uses as a residence, or in a burial plot for the debtor or a dependent of the debtor.
2. $3,225 for one motor vehicle.
3. $525 for any particular item or $10,775 in aggregate value, in household furnishings, household goods, wearing apparel, appliances, books, animals, crops, or musical instruments, that are held primarily for the person, family, or household use of the debtor or a dependent or the debtor.
4. Up to $1,350 for jewelry held primarily for personal, family, or household.
5. $1,075 plus up to $10,125 of any unused amount of the exemption provided under paragraph (1).
6. Up to $2,025 in value, in any implements, professional books, or tools of the trade of the debtor or the trade of a dependent of the debtor.
7. Any unmatured life insurance contract, owned by the debtor, other than a credit life insurance contract.
8. $10,775 less any amount of property of the estate transferred in the manner specified in section 542(d) of this title, in any accrued dividend or interest under, or loan value of, any unmatured life insurance contract owned by the debtor under which the insured is the debtor of an individual of whom the debtor is a dependent.
9. Professionally prescribed health aids for the debtor or a dependant of the debtor.
10. The debtor’s right to receive –

    (A) a social security benefit, unemployment compensation, or a local public assistance benefit;
    
    (B) a veterans’ benefit;
    
    (C) a disability, illness, or unemployment benefit;
    
    (D) alimony, support, or separate maintenance, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor;
    
    (E) a payment under a stock bonus, pension, profit-sharing, annuity, or similar plan or contract on account of illness, disability, death, age, or length of service, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor, unless—
    
    (i) such plan or contract was established by or under the auspices of an insider that employed the debtor at the time the debtor’s rights under such plan or contract arose;
    
    (ii) such payment is on account of age or length of service; and such plan or contract does not qualify under section 401(a), 403(a), 403(b), or 408 of Internal Revenue Code of 1986 (the "IRS Code").
    
    

11. An amount not to exceed $1,095,00 in an Individual Retirement Account described in section 408 or 408A of the IRS Code, other than a simplified employee pension under 408(k) or a simple retirement account under 408(p).
12. The debtor’s right to receive, or property that is traceable to —
    
    (A) an award under a crime victim’s reparation law;

    (B) a payment on account of the wrongful death of an individual of whom the debtor was a dependent, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor;

    (C) a payment under a life insurance contract that insured the life of an individual of whom the debtor was a dependent on the date of such individual’s death, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor;

    (D) a payment, not to exceed $20,200 on account of personal bodily injury, not including pain and suffering or compensation for actual pecuniary loss, of the debtor or an individual of whom the debtor is a dependent; or

    (E) a payment in compensation of loss of future earnings of the debtor or an individual of whom the debtor is or was a dependent, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor.

Bankruptcy Rule 4003(b) provides that a Trustee or other interested party may object to scheduled exemptions if it is done within 30 days after the § 341 First Meeting of Creditors or the filing of any amendments. If no objections to the exemptions are filed, then the exemptions are accepted for the purpose of the case.

If an objection to any or all of the exemptions is filed, the debtor has an opportunity to oppose the objection and prove his claim by a written response. The court may or may not allow a hearing on the matter.

Query: What happens if you claim an exemption that is without authority but there is no timely objection – does the debtor get to use the improper exemption? Under Taylor v. Freeland & Kronz, 503 U.S. 638 (12 S. Ct. 1644 (1992)), unless a party in interest makes a timely objection, the exemption stands. However, if there is intentional, improper conduct to include the improper exemption there are severe sanctions available against both the debtor and its counsel.

The Bankruptcy Code (§ 522(b)(1)) allows a debtor to elect either the Code exemptions (§ 522(d)) or the exemptions allowed under both state law of domicile and other federal law. You must quantify and analyze your client’s assets in the context of § 522(d) exemptions versus your state and "other" federal exemptions to measure whether the federal exemptions not included in § 522(d) and the state exemptions outweigh the benefit of § 522(d) exemptions.

Probably the most common "exemption" protection is the prohibition against assignment or alienation of assets contained in retirement plans regulated by the Employee Retirement Income Security Act (ERISA) 29 U.S.C. §§ 1001 et seq. The statutory protection was clarified and enhanced by Patterson v. Shumate, 504 U.S. 753, 112 S.Ct. 2242, 119 L.Ed. 2d 519 and 505 U.S. 1239 (1992). The Supreme Court in Patterson v. Shumate ruled that the anti-alienation provision of ERISA qualified pension plans excluded the property from the bankruptcy estate per 11 U.S.C. § 541(c)(2). In light of this holding, if the debtor’s plan is ERISA qualified, there is no need to consider or ask for an exemption. (But remember that the IRA is not ERISA qualified and there is no anti-alienation provision to protect it so you must review the local exemption law carefully, and recognize that the new bankruptcy law limits the IRA to $1,095,000 in 2008.)

Perhaps the most notorious beneficiary of the ERISA anti-alienation provision was O.J. Simpson.

Civil Service employee retirement Annuity payments may not be assigned or be subject to execution, levy, attachment, garnishment or other legal process unless provided by other Federal laws. (5 U.S.C. §§ 8130, 8346). Child support and alimony in the form of a property QDRO is one of the "other Federal laws" provided in the ERISA statute 29 USC §§ 1001, et seq.

The protection above is true for annuities paid to members of the armed forces. (10 U.S.C. § 1440); foreign service employees (22 U.S.C. § 4060); survivors of most federal judicial officials (28 U.S.C. § 376); CIA employees(50 U.S.C. § 2094) and Social Security benefits (42 U.S.C. § 407).

15 U.S.C. §§ 1673 and 1675 have long established limitations on wage garnishments: 25% of disposable earnings per week or 30 times the minimum wage, whichever is less.

Members of the armed forces on a permanent duty assignment outside the U.S. may keep this pay safe from all creditors by depositing some or all of the allotted pay with a branch, office or officer of a uniformed service. (10 U.S.C. § 1035)

50 U.S.C. §§ 523 and 524 have imposed a stay or vacation from execution on persons in military service. This applies to actions commenced before, during or within 60 days after active duty.

NOTE. We have all fallen into the habit of signing and submitting Soldiers’ and Sailors’ Relief Act Affidavits before final judgment will be entered in default cases.

The affidavit may be an invitation for trouble from the court or a defense counsel. If the affiant has not actually checked with the Department of Defense, he/she may find themselves in trouble with the court, Bar Counsel and they could even be found liable for damages. It is not that difficult and well worth the trouble to call the DOD Military Locater Service before signing the standard SSRA form. Army: (703) 325-3732; Navy: (901) 874-3388; Marine Corps: (703) 784-2507.

Remember that diplomats, some embassy employees and treaty organization members have their own special rules and protections. In Washington, D.C., it is commonplace to encounter a debtor that is a diplomat or that works for an embassy or treaty organization. The diplomats are protected from judicial proceedings and you can not execute judgment against treaty organizations.

However, most international organizations and foreign countries do not encourage deadbeats. It is possible to get waivers of immunity from a home office to sue diplomats but often the threat to even ask will encourage collection. There are often other collection pressures that can be applied by the personnel directors of treaty organizations and embassies even when an execution may not be possible.

E. Comparison of Exemption Laws
In the D.C. Metro Area

The following charts describe the major exemptions available in the three jurisdictions and the Bankruuptcy Code exemptions.

Comparison of Major Exemptions

*MD Code Section 11-504