18 Oct Bankruptcy as an Asset Protection Tool – Part 1
Clearly half of my bankruptcy clients have high household income and have accumulated lots of assets. They owe little or no unsecured debt (e.g. credit cards and medical bills), and their car payments are current or non-existent.
So why would someone NOT in financial trouble file a bankruptcy? Bankruptcy is usually the most effective way to encapsulate and protect assets from underwater real estate.
These asset-protection clients fall into one of two categories: Some of these clients file solely to force their mortgage company to modify their home loan in the Chapter 13 Mortgage Modification Mediation Program, and the rest of these fiscally responsible clients are using bankruptcy to surrender underwater real estate back to the mortgage company.
DOES THIS PORTFOLIO MAKE MY ASSETS LOOK BIG?
So, the title of this article suggests, â€œRich people can protect assets in bankruptcy.â€ In many cases, this is an absolutely true statement. I have personally filed bankruptcy for tens of dozens of â€œrichâ€ people with hundreds of thousands of dollars in non-exempt assets and/or high, six figure incomes . . . and they get to keep everything.
The key is that, as long as a debtor pays 100% of his unsecured debt (e.g. credit cards and medical bills), he or she gets to keep every asset not securing a debt. Since most rich people have little or no unsecured debt, this is a no-brainer.
Okay, so youâ€™re not â€œrich,â€ but you definitely have some â€œstress-reductionâ€ toys you accumulated when times were better. Youâ€™re managing the debt, but itâ€™s a struggle. Furthermore, your credit is taking a pounding because youâ€™re behind on your house payments. This strategy works just as well for you.
Letâ€™s say you have $20,000 in credit card debt across 4 different lenders. You will have to pay that debt back over the life of the Chapter 13 plan if each lender files a timely, valid proof of claim. The truth is that credit card companies (and their debt collection companies) often fail to follow the rules of the Bankruptcy Code, leaving many claims vulnerable to objections. If the lender fails to come correct, the claim is wiped out.
CHAPTER 13 IN THE EXPRESS LANE
Under the Bankruptcy Code, a debtor with household income above the “median” must stay in a Chapter 13 Bankruptcy for 5 YEARS. Well, my rich clients don’t have time for a five-year plan. It’s a good thing that there is an important exception to this general rule: A debtor can exit a Chapter 13 bankruptcy with a discharge as soon as he pays 100% of his unsecured debt. We have already established that rich debtors usually have little unsecured debt, and that means these clients get finish their Chapter 13 case in as little as 8 MONTHS.
Now that weâ€™ve established that â€œrichâ€ people can and do file bankruptcies to encapsulate and protect assets and income, Part 2 will explore HOW bankruptcy fixes that underwater house.
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