Mistakes to Avoid–Don’t Sell or Borrow Against Assets Protected in Bankruptcy
July 29, 2013
Give yourself a fresh financial start not just with your debts, but also with your assets.
How to How to Get the Most out Of Your Bankruptcy
The focus in bankruptcy is on dealing with your debts, wiping out and getting a handle on the negative side of your balance sheet. But getting a financial fresh start means not just getting relieved of your debts, but also protecting your essential assets—the positive side of your balance sheet. You can maximize this crucial benefit of bankruptcy by not selling, using up, or borrowing against your protected assets BEFORE filing your bankruptcy case.
In my daily work as a bankruptcy attorney, I constantly meet with new clients who have sold, spent, or borrowed against important assets in desperate attempts to keep their heads above water. Some of them have even done so thinking that they would just lose that asset once they file a bankruptcy so why hang onto it. But it is much more difficult to get your financial footing if you have nothing to stand on—if you don’t have at least basic housing, household goods, clothing, transportation, and, where appropriate, tools of trade, unemployment or disability benefits, and retirement savings.
Bankruptcy Protects Assets
If you are like most people, bankruptcy will protect all of your assets. First, Chapter 7 “straight bankruptcy” protects all “exempt” assets, so that a very high percentage of people who file under Chapter 7 keep everything they own. Second, if you have assets which are worth more than the applicable “exempt” amounts provided by law, Chapter 13 “adjustment of debts” can almost always protect those “non-exempt” assets as well. And third, if you do have assets that are not “exempt,” with wise pre-bankruptcy planning with a knowledgeable bankruptcy attorney those assets can be all the better protected once your bankruptcy case is filed.
Get Legal Advice BEFORE Wasting Your Assets
Bankruptcy cannot protect what you’ve already squandered. When people sell, spend, or borrow against their assets before filing bankruptcy, most of the time those assets would have been completely protected had they filed bankruptcy while they still had them.
Think about this: if you are considering spending, selling, or borrowing against any of your assets, do you know whether that asset is one which would be protected in bankruptcy? Do you know the full consequences of whatever you are planning on doing, either in your effort to avoid filing bankruptcy or to position yourself for filing?
These kinds of decisions can have serious long-term consequences, so they shouldn’t be made without legal advice about the alternatives. Consider a person in her late-50s cashing in a substantial amount of her 401(k) retirement plan to keep paying creditors when those creditors could be—and eventually are–written off in bankruptcy. That decision would likely significantly harm the quality of her retirement lifetime, with no tangible benefit to show for it. IRAs, for example are exempt to $1 million, and in may cases even more. I once had a client from La Quinta, California, a town near my main office in Cathedral City. He was rocked with catastrophic medical bills, but had almost $750,000 in a rollover IRA. I was able to save all of it while getting rid of the medical debt in a Chapter 7 bankruptcy.
Or consider a husband and wife selling a free-and-clear vehicle that’s in good condition on the assumption that they’ll lose it once they file bankruptcy, using the money to pay creditors that could be—and eventually are written off in bankruptcy—only to be left with a single older vehicle that won’t reliably get them to work. That decision would lead to anything but a fresh start for them. Of course they would have been better off to find out if their reliable vehicle could have been protected, which it almost certainly could have through either Chapter 7 or Chapter 13, possibly assisted by some asset protection planning beforehand.
For understandable reasons and some not so sensible ones, people tend to get legal advice only when they are in serious trouble, and after they have made and acted on these kinds of harmful decisions. Please avoid this. You can get a better fresh start by getting the necessary advice so that you can preserve your important assets before they are gone.