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Asset Protection Nightmares in Bankruptcy Court

By: T.C. Rollins

Many people use self-help methods to avoid estate and probate issues. Their goal is to ensure the transfer of assets to family members upon their death. While this method of asset transfer will save you attorneys fees, it could be costly in the long run if one of your family members runs into financial trouble. As a bankruptcy lawyer, I see the consequences of these actions all the time.

Bank Accounts

Every month I have a client consult with me for bankruptcy and as part of the client interview I find out that they are listed on their elderly mother’s bank account. Mom may be mentally or physically incapacitated and need help keeping the bills paid. The problem with this arrangement is that by adding a family member to this account, the family member is now an equal owner of the account. In fact, now mom and the family member both own the full balance of the account. The family member’s creditors could garnish the bank account and take all of mom’s money. If your family member files bankruptcy, the entire account balance could be seized by the bankruptcy trustee.

It is very important that if you need to help someone with their finances that you make sure the bank lists you as a custodian and not an owner of the account. You should also consult with an elder law attorney about whether a conservatorship or guardianship would be appropriate.

If you don’t need help with your finances and only want to pass your account to your heirs without probate, then you should add them as the “pay on death” beneficiary on your bank account.

Real Estate

There are two common ways that people go about skipping probate for real estate. Oftentimes people will add their children to the deed for their real estate. Other times, people will transfer their property to their children and retain a life estate. Either situation can cause problems if your family member runs into financial trouble. The first concern is that either of these transactions could jeopardize the tax savings you receive from homestead exemption on the property. The bigger concern is that your family member’s creditors could place a lien on your property and possibly even foreclose on the property. If keeping your property safe from creditors is a priority, then it is a worthwhile investment to consult with an estate planning lawyer about creating a trust.

Retirement Accounts

Finally, the most heartbreaking mistake I see from people prior to filing bankruptcy is cashing in retirement accounts to try and pay off debt. Many times I see people that have cashed out thousands of dollars and still have not solved their financial problems. They could have filed a bankruptcy and eliminated the debt while keeping all of their retirement assets.

T.C. Rollins is a bankruptcy lawyer serving Jackson, Clinton and Ridgeland, Mississippi.

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