Involuntary Bankruptcy: Part Two.

By Julianne Frank - Email Editor

Date : 08-May-2007

Dear Subscriber:

Last month, we pondered the possibility that you could be forced into involuntary bankruptcy, thereby losing certain protections from creditors that would otherwise have been available to you under the laws of your state.

What are the consequences of bankruptcy, and why might it not be a viable solution to your debt woes? As we saw last month, you might lose your home in a bankruptcy when you might have kept it had you chosen to fight your battle elsewhere. There may be other assets that are at greater risk under bankruptcy as well.

For example, most states grant an exemption for retirement accounts, such as IRAs or 401Ks. (“Exemptions” being the state laws that declare assets off limits to creditors.) Under the new bankruptcy laws, however, retirement accounts over certain dollar limits and under given circumstances may be liquidated by the bankruptcy trustee for the benefit of your creditors.

Nor can you count on common law marital exemptions to save you. In some states, protection is afforded over assets that are jointly held with a spouse in a form of ownership known as “tenants by the entirety”–wherein marital assets may be insulated from creditors who are pursuing only one spouse. This protection disappears in many bankruptcy settings.

The moral of the story? It may make sense for a pursuing creditor to throw you into a bankruptcy, thereby building a bridge that allows them to cross the moat and storm the castle.

Steering Clear
It may be impossible to avoid being declared involuntarily bankrupt. If you have less than twelve creditors, it only takes one to pull the proverbial trigger. If you have more than twelve, it takes three of them working in concert to put you there, so it is always best to have a divergent and geographically separated body of creditors. If you can establish a bonafide dispute exists with one or more of your petitioning creditors, you may compromise their power to throw you into bankruptcy.

The good news is that even if bankruptcy is unavoidable, proper Asset Protection techniques may put your assets out of the reach of even the bankruptcy system. Let's consider the implications:

Knowing that you confronted the prospect of a creditor attack or involuntary bankruptcy, you, under the watchful tutelage of a competent Asset Protection advisor, divested your ownership attributes of certain assets while retaining ultimate beneficial value. If done properly, you can be comforted that the asset has been insulated. What you must be prepared to sacrifice is what is known as “the discharge.” The discharge is the federal court order that emanates from the end of a bankruptcy proceeding, rendering you free from your debts. Even well-timed Asset Protection Planning is likely to result in your discharge being denied. I say this does not matter. Why?

First, because what we are talking about here is involuntary bankruptcy. You did not choose it, so you certainly did not have any expectation of magical freedom from your creditors. If your assets are protected, who cares about discharge?

Second, the discharge has as one of its principal benefits, the eventual restoration of one's credit standing. By the time you are confronting the prospect of an involuntary bankruptcy, you are likely to be long past worrying about your credit standing. Your only focus will be on asset preservation.

The issue, however, remains one of timing. While proper timing may not afford you a bankruptcy discharge, it may help you avoid other precarious pitfalls, such as contempt. It is therefore never too early to consider Asset Protection Planning, and there often becomes a time when it is too late, even for the most skillful of planners.

Julianne Frank, Esq.

ABOUT THIS EDITOR:

Full Bio - Email Julianne Frank, Esq