What happens to Assets during Bankruptcy?

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For many people, Chapter 7 is a great tool for eliminating debt and obtaining a fresh start. The catch is that a trustee is appointed to liquidate any property that’s not protected by state (or federal) law and use it to pay creditors. While most people get to keep their basic belongings, and sometimes all of their property, we run into problems when we learn that our clients were placed on property like a bank account or real estate. In this article, we’ll discuss what happens to assets during bankruptcy.

Title to property usually means legal ownership. If you were so kind as to put me on your bank account, I could legally go in and withdraw money in that account, even though I didn’t earn it. Our clients (and therefore us) are required under oath to list all interests in property in bankruptcy paperwork. That includes any interest in property, even if “it’s my dad’s” or “that was for avoiding probate”.

A better solution? Speak with a lawyer who understands estate planning and bankruptcy law. For instance, 70 year old father owns real estate with significant equity. To avoid probate, he quitclaims property to himself and his eldest daughter. If he dies, then daughter is now the sole owner of the real estate. Problem solved, right? Well, no, if daughter needs relief from her debts. With her legal interest in the property, she could see a Chapter 7 trustee try to liquidate her interest in the property (or be forced to buy it back from the trustee) or have to pay a large Chapter 13 payment to unsecured creditors to keep the property in the family. That’s not what father intended at all!

Instead, we would understand father’s goals and propose ideas like transfer on death (TOD) deeds or beneficiary deeds. These documents don’t give daughter legal interest in the property yet but accomplish the same goal (avoiding probate) while avoiding the ability of creditors or a trustee from trying to collect against the property. We might also suggest father have a frank discussion with daughter about her financial situation before executing any documents. Even an estate planner who is sharp might not have the familiarity with bankruptcy to appreciate why one approach might be better than the other and avoid risks.

That’s why we’ve seen our estate planning and probate practice grow even as consumer (and business) bankruptcies continue to be a substantial number of our cases. Having a firm that understands both fields is an extra that most competitors can’t offer. But at WM Law, whether it comes to estate planning, bankruptcy, or both, we are….HERE TO HELP.

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Jeffrey L. Wagoner


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