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 protecting assets becomes crucial to prevent loss during such times. 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.

Understanding Bankruptcy Asset Protection Basics

Bankruptcy is a legal lifeline for individuals and businesses drowning in debt. When you file for bankruptcy, you initiate a process that can provide relief from overwhelming financial obligations. This process begins with the filing of a petition in bankruptcy court, which triggers an automatic stay. This stay halts creditors from pursuing collection actions against you, giving you some much-needed breathing room.

There are several types of bankruptcy, each designed to address different financial situations. Chapter 7, often referred to as liquidation bankruptcy, involves selling off your non-exempt assets to repay creditors. This type of bankruptcy is typically suited for individuals with limited income and significant unsecured debts. On the other hand, Chapter 11 is a reorganization bankruptcy primarily used by businesses. It allows the debtor to create a plan to repay creditors over time while continuing operations. Chapter 13, another form of reorganization bankruptcy, is available to individuals. It enables debtors to keep their assets and repay creditors through a structured repayment plan.

Navigating the bankruptcy process can be complex and time-consuming, making it essential to hire an experienced attorney. A knowledgeable lawyer can guide you through the intricacies of bankruptcy proceedings, ensuring that you make informed decisions every step of the way.

The Role of the Bankruptcy Trustee

The bankruptcy trustee plays a pivotal role in the bankruptcy process, acting as the administrator of the bankruptcy estate. Appointed by the court, the trustee’s primary responsibility is to ensure that the debtor’s assets are distributed fairly among creditors.

In a Chapter 7 bankruptcy, the trustee’s job is to gather and liquidate the debtor’s non-exempt assets. This means selling off assets that are not protected under federal or state exemption laws and using the proceeds to repay creditors. The trustee also has the authority to recover money or property through “avoiding powers,” which can include reversing preferential transfers made to creditors shortly before the bankruptcy filing.

In a Chapter 13 bankruptcy, the trustee’s role shifts to overseeing the debtor’s repayment plan. The trustee reviews the proposed plan to ensure it is feasible and fair to creditors. They may make recommendations to the court and can object to the plan if it does not meet the necessary criteria. The trustee also collects payments from the debtor and distributes them to creditors according to the approved plan.

The bankruptcy trustee is a crucial figure in ensuring that the bankruptcy process is conducted fairly and efficiently, protecting the interests of both the debtor and the creditors.

Protected and Non-Exempt Assets

When you file for bankruptcy, understanding which of your assets are protected and which are not is crucial. Protected assets, known as exempt assets, are those that you can keep despite the bankruptcy filing. These exemptions are designed to ensure that you can maintain a basic standard of living while repaying your debts.

Common exempt assets include:

• Your primary residence, up to a certain value.
• A motor vehicle, up to a certain value.
• Personal property such as furniture, appliances, and clothing.
• Tools of the trade necessary for your profession.
• Life insurance policies.
• Retirement accounts like 401(k)s and IRAs.

On the other hand, non-exempt assets are those that can be sold or repossessed to repay your creditors. These might include:

• Cash on hand.
• Stocks and bonds.
• Real estate other than your primary residence.
• Additional vehicles beyond the primary one.
• Personal property not covered by exemptions.

Knowing the difference between exempt and non-exempt assets can help you develop effective asset protection strategies during bankruptcy proceedings. Consulting with a bankruptcy attorney can provide clarity on how to best protect your assets under federal bankruptcy laws.

Secured vs. Unsecured Debts

In the realm of bankruptcy asset protection, debts are categorized as either secured or unsecured, and understanding this distinction is key to navigating your financial situation. Secured debts are those backed by collateral, meaning the creditor has a claim on an asset if you default on the loan. Common examples include mortgages and car loans. If you fail to make payments, the creditor can repossess the collateral, such as your home or vehicle.

Unsecured debts, on the other hand, are not tied to any specific asset. These include credit card debt, medical bills, and personal loans. Because there is no collateral backing these debts, they are generally dischargeable in bankruptcy, meaning you can eliminate them through the bankruptcy process.

However, the dischargeability of debts can vary. Secured debts are typically not dischargeable unless you surrender the collateral. Unsecured debts, depending on their nature and your financial situation, may be fully or partially discharged. Understanding the nature of your debts can help you make informed decisions about your bankruptcy filing and how to best manage your financial obligations.

Asset Inventory and Disclosure

A critical step in the bankruptcy process is providing a detailed inventory of your assets and liabilities. This inventory helps determine which of your assets are exempt and which are non-exempt, guiding the trustee in the administration of your bankruptcy estate. Full disclosure of all assets, including those that are exempt, is mandatory. This transparency ensures that the bankruptcy proceedings are fair and that creditors receive their due share.

Failing to disclose assets or providing inaccurate information can have severe consequences. It can lead to the denial of your discharge, meaning you would remain liable for your debts, or even result in the dismissal of your bankruptcy case altogether.

Working with an experienced bankruptcy attorney is essential to ensure that your asset inventory and disclosure are accurate and complete. An attorney can help you identify which assets are exempt under the federal exemption system and develop strategies for protecting those assets during the bankruptcy process. This professional guidance can make a significant difference in the outcome of your bankruptcy case, helping you achieve a fresh financial start.