Mistakes to Avoid–Don’t Sell or Borrow Against Assets Protected in Bankruptcy

Posted by on September 8, 2016 under Bankruptcy Blog | Be the First to Comment

 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. This is usually a mistake.

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.  Oddly enough, this is called a “no asset case” because the Trustee does not administer (= sells) any of the debtor’s assets.  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 may be all the better protected once your bankruptcy case is filed.

Get Legal Advice BEFORE Wasting Your Assets

If you are considering spending, selling, or borrowing against any of your assets to pay your debts, do you know whether that asset is one which would be protected in bankruptcy?

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.  Or consider a husband and wife selling a free-and-clear vehicle that’s in good condition to pay creditors that eventually are written off in bankruptcy.  Under certain circumstances, that vehicle may be exempted or a deal can be made with the trustee that allows you to keep the vehicle.

These kinds of decisions can have serious long-term consequences, so they shouldn’t be made without legal advice about the alternatives.