Asset Protection In Bankruptcy
You can use bankruptcy to protect your assets. Many people worry so much about losing property in bankruptcy that they do not realize it is a vital tool for actually protecting assets. The most important thing about asset protection is that it be done right. A poorly constructed asset protection strategy will do more harm than good.
Why You Need Asset Protection
When you cannot manage your debts, your assets are at risk. If your creditors get a judgment against you then they can seize your personal property, your real property, your bank accounts, and garnish your wages. In addition, if a creditor records a judgment then it becomes a lien on your real property. This lien will prevent you from selling your house or refinancing your house. Asset protection allows you to protect your property from your creditors.
Choosing An Attorney For Asset Protection
You must make sure that you choose the right bankruptcy lawyer to help you protect your assets. Asset protection is very difficult. If your lawyer is overly-cautious, then you may end up losing assets that could have been protected. If your lawyer is overly aggressive, you risk an expensive bankruptcy.
Additionally, your lawyer must understand that asset protection requires honesty. Asset planning is not bankruptcy fraud. The Bankruptcy Code requires you to list all of your assets and interests in assets. Additionally, you are required to list any transaction that falls within one of the Bankruptcy Code’s look-back periods. If you are required to list something on your bankruptcy petition and you fail to list it, then you risk losing your discharge and criminal prosecution.
Some lawyers will tell you that it never rains in Seattle, if that’s what it takes to get your business. Those lawyers are a danger to their clients. Unfortunately, part of being a good bankruptcy lawyer is being able to give a client bad news and tell them when they have hard choices. In a perfect world, you could protect all of your assets. In reality, sometimes it comes down to whether it will cost you more to file bankruptcy or cost you more to deal with your creditors outside of bankruptcy.
Understanding How Assets Are Treated In Bankruptcy
The first step to protecting assets in bankruptcy is understanding exemptions. When you file bankruptcy, you submit a list of all of your assets and a list of all of your claimed exemptions. All of the non-exempt equity in your property and your property interests becomes property of the bankruptcy estate and is subject to liquidation by the chapter 7 trustee or must be included in the liquidation value of your plan in a chapter 13 or chapter 11. Therefore, the goal is to make sure that all of your assets are protected by an exemption.
Equity in your property is the fair market value of the property, minus any liens secured on the property. For example, if your house is worth $250,000 and you have a $200,000 mortgage, then you have $50,000 in equity.
Exemptions are created by statute to protect equity in your property. The purpose of bankruptcy is to give you a fresh start. You can’t get a fresh start if you lose all of your property in bankruptcy.
If an asset is not protected by an exemption, then the treatment of the property is determined by the chapter of bankruptcy that you filed:
Asset Protection Strategies In Bankruptcy
The goal of asset protection is to minimize the non-exempt equity in your property. The best strategy is to treat all cases like they are a chapter 7 bankruptcy. This is because even though a reorganization bankruptcy does not involve the liquidation of property, you use a hypothetical liquidation value to determine the plan payments.
- Timing: By far the best thing that you can do is contact an attorney as soon as you think that you might be at risk for collection actions from creditors. The more time that I have to work with you, the more options that you have. This is because many forms of asset planning work best when you don’t have to disclose them on your bankruptcy petition at all. The bankruptcy petition has various look-back periods for disclosure. You get the most protection if you can engage in asset planning and legitimately exclude the transactions from your bankruptcy petition.
Let me be very clear, however, if a transaction falls within a look-back period, you have an asset, or an interest in an asset you must disclose that to your attorney and you must disclose it on your petition. Omitting transactions, assets, or interest in assets from the bankruptcy petition is an extremely serious offense that could result in loss of your discharge or criminal prosecution.
- Strategic Exemption Planning – A chapter 7 trustee is more likely to certain kinds of property, typically property that is easy to liquidate. For example, it is easy to liquidate cash or cash equivalent assets, such as stocks, bonds, and certain insurance policies. Additionally, it is easy to liquidate assets that have a ready market, such as houses, cars, and jewelry. Certain property is hard to liquidate because there is no ready market, the value is hard to determine, or it has very little value. Therefore, you can structure your exemptions so that the easiest to liquidate assets are the most protected.
- Selling Assets – You have to be careful if you want to liquidate property ahead of filing bankruptcy. This requires you to properly time your bankruptcy and properly document the transaction. You need to make sure that you meet three requirements when selling property ahead of filing bankruptcy: 1) you must sell it for its fair market value, 2) you must keep a record of who you sold it to, and 3) you must keep a record of how you used the proceeds.
- Converting Assets From Non-Exempt to Exempt – Certain assets are easier to protect than others. For example, cash is one of the hardest assets to protect. By contrast, retirement accounts are easy to protect. So if you have a large amount of cash, you should consider transferring it into a retirement account. Again, converting assets from non-exempt to exempt requires careful planning and proper disclosure.
- Paying Automatically Non-Dischargeable Debts – Certain debts are automatically non-dischargeable in bankruptcy. If you have assets that you know that you cannot protect and you have time, then you can use those assets yourself and pay the automatically non-dischargeable debts.
For example if you have unpaid 941 withholdings and an asset that cannot be protected in bankruptcy, use that asset to make payments towards the unpaid 941 withholding. Then wait at least 90 days between the date of the payment and the date that you file bankruptcy; and, then, the payment cannot be recovered under preference laws.
Special Types Of Assets In Bankruptcy
In bankruptcy, any asset or interest in an asset can become property of the estate. This means that virtually anything can become property of the estate if it is not properly protected. When you are considering bankruptcy, there are few classes of assets that require special care:
- Cash: Cash is the hardest asset to protect in bankruptcy. This is because cash is easy to seize and requires no effort to liquidate. You should not stockpile cash in the period before you file bankruptcy.
- Retirement Accounts and Pensions: Retirement accounts are automatically given a 100% protection in bankruptcy. The only exception is IRA accounts with more than $1 million in them.
- Bank Accounts, Cash Value Life Insurance Policies, and Investment Accounts: Unless an account is a retirement account, it is treated just like cash.
- Trust Property: If you are the beneficiary of a trust, then the trust is only protected if it is a spendthrift trust. If you are the beneficiary of a trust, then your bankruptcy attorney must review the trust documents to determine whether your trust can be protected. If you serve as a trustee, then that trust is not part of the bankruptcy estate.
- Income Producing Assets: If you have an asset that produces income – including a rental house – then that income could become part of the bankruptcy estate. Any income producing asset requires your bankruptcy lawyer to determine how to value the asset for the purposes of protecting it from the trustee or your creditors.
- Business Owners: If you own a business, then the business, the income from the business, or the business’ accounts receivable could all be property of the bankruptcy estate or subject to seizure by your creditors. Your attorney will work with you to analyze the business structure and value the business to determine how it can be best protected.
The fear of losing assets is one of the most stressful parts of being in debt. Bankruptcy is an important tool in protecting your assets both now and in the future. As a Seattle bankruptcy attorney, I work with my clients to protect their assets and to make sure that they comply with all state and federal law in the process. If you have assets that are at risk or that may become at risk, the most important thing you can do is talk to an attorney as soon as possible. The more time that I have to work with you, the more help I can offer.