How to Lose the Property You Really Want to Keep When You File a Bankruptcy?
Of course, the question that forms the title of this article is asked tongue in cheek. For my clients, losing the property they want to keep is never the goal! So the real question is how do you maximize your chances of keeping your property in a Bankruptcy. The answer is simple. You follow the rules. Knowing the rules, though, is often the real challenge.
Unfortunately, in today’s world of the internet and easy access to information, it is easy for a potential client, armed with a little bit of knowledge from his or her internet legal research, to make some big mistakes before even meeting with an attorney in preparing for a Bankruptcy filing. Often, such an individual’s efforts to try to protect property or to limit the impact of a Bankruptcy on his or her loved ones backfires because the legal system has many built-in protections to ensure fairness to all parties and to discourage any “funny business” by clients to avoid their creditors.
What do I mean by “funny business?” I have had clients ask not to list a specific debt and tell me “I don’t want to include that family member in my Bankruptcy.” Other clients have reported to me at our initial meeting that they no longer have a car or other bank account when asked about their assets. When pressed, the client admits that in anticipation of our meeting, they have “put the car in someone else’s name so it won’t be a problem.” Of course, there are still other clients who never reveal information to me because they think that will help them better protect certain prized possessions. All of these efforts at trying to protect property or specific creditors are ill-advised and almost always result in the direct loss of that property or in sanctions on the clients themselves. Those sanctions can include the simple denial of a client’s discharge of debt, the loss of assets, or even imprisonment for fraud.
Not Listing a Family Member
A main tenet of the Bankruptcy system is fairness to all parties, including all of the creditors and the clients themselves. Of the misdeeds described in this article, arguably the most innocent may the desire of a client to not discharge a debt to his or her family member by not revealing that obligation on the Bankruptcy petition. While I can appreciate that such desire stems from a client’s interest in protecting his or her family member as well as protecting the client’s own pride, the Bankruptcy Code clearly requires that all debts are disclosed regardless of whether the money is owed to family, friends or one of the big national banks. The Bankruptcy Code is designed to ensure that all creditors are treated fairly and have notice of the proceeding. For example, if distributions will be made to creditors in the case, all creditors including family members have the right to participate. By failing to list a family member in a petition, the client is effectively denying that family member the right to receive distributions or to raise other appropriate issues in the Bankruptcy forum.
Recent Transfers of Property
Some individuals mistakenly believe that giving away, selling or transferring property “out of their names” will protect the asset in a Bankruptcy. Sometimes I see this with priceless family firearms that have been passed down through generations. Other times, for example, I have had clients tell me about cars they put in their son’s name or bank accounts they closed out. In most of these cases, the very action the clients have taken to try to protect their assets is the action that will ensure that they lose them.
With respect to the firearm example, a client in Bankruptcy typically could have easily protected the item through special inheritance or firearm exemptions if they just retained ownership of it and disclosed it. By transferring the property out of one’s name, the Bankruptcy Trustee might be permitted to void the transfer and recover the item to sell and pay to creditors. The example of the transferred car on the eve of Bankruptcy would work the same way with the same disastrous result. Typically it is easier to protect an asset by disclosing it in the Bankruptcy and applying the appropriate exemption.
In the case of bank accounts, there may, in fact, be limited amounts of cash a client can protect. However, with an experienced attorney’s assistance, a client may have opportunities to convert that cash into other exempt assets, like pre-need funeral contracts, necessary household goods and furnishings, or prescribed medical devices. Such pre-bankruptcy planning, though, can be fraught with complications for the client and should be approached cautiously and only with careful attorney instruction. If not, a well-meaning client might be seen as overreaching and face allegations of fraud. The courts rarely define how much pre-bankruptcy planning is appropriate, and legal scholars generally sum matters up with the simple maxim, “pigs get fed and hogs get slaughtered.” In other words, while some reasonable, appropriate and necessary pre-bankruptcy planning may be appropriate, if such efforts are too aggressive and appear in bad faith, the client risks losing his Bankruptcy discharge, the assets, or worse.
Hiding or Failing to Disclose Assets
The biggest mistake a client can make is to fail to disclose actual assets on a Bankruptcy petition. An example of this would be the client who does not report a potential claim they may have against a third party, such as a car accident personal injury lawsuit or other claim. If the goal behind the nondisclosure is a client’s expectation that it will keep the Bankruptcy from negatively impacting the lawsuit, the client will be surprised to learn that his or her very actions will actually bar the personal injury claim or other lawsuit from proceeding further. In fact, the client will effectively give up any rights he or she may have had to the lawsuit and to the damages award that might otherwise flow from it by failing to disclose the potential asset in the Bankruptcy petition. The irony is that in most personal injury cases, the damages award would be fully exempt and protected in a Bankruptcy proceeding if properly disclosed.
Over the years, courts all across the country have written opinions to reiterate that the “fresh start” offered by Bankruptcy is reserved for the “honest but unfortunate” individuals facing overwhelming debt. The key is in the word, “honest.” Preserving the right to the relief offered by Bankruptcy requires that the client proceed honestly, in good faith, and according to the rules of the system.
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