Mistakes to Avoid: Selling or Borrowing Against Assets Protected in Bankruptcy
Aug. 28, 2015
Give both you, AND your assets, a fresh financial start.
Getting the Most Out of Your Bankruptcy
When you’re considering bankruptcy your mind is likely mostly on how to deal with your debts. You’re focused on getting a handle on the negative side of your balance sheet. But getting a financial fresh start also means protecting your assets—the positive side of your balance sheet. You can get much more benefit out of bankruptcy by not selling, using up, or borrowing against what you own BEFORE filing your bankruptcy case.
It’s certainly understandable that you might sell some stuff to pay essential debts or expenses. And it may make sense at the time to use savings or some other precious funds set aside for retirement or some other long-term purpose in order to make debt payments. And who hasn’t been tempted to borrow against their home or life insurance or retirement fund to keep their heads above water?
But it’s much more difficult to get a realistic and sustainable fresh financial start after you’ve sold, used up, or borrowed against those assets that are valuable to you. It’s so much saner when you have a stable roof over your head, reliable transportation, and, where appropriate, your tools of trade, your retirement savings. It’s much easier to regain your financial footing if you still have your assets to stand on.
Bankruptcy Protects Your Assets
If your circumstances are like most people’s, bankruptcy will protect all of your assets.
First, Chapter 7 “straight bankruptcy” protects all “exempt” assets. If you’re like most people who file under Chapter 7, everything you own is likely legally “exempt.” So there’s a good chance you could keep everything, too.
Second, if you do have assets that are worth more than the “exempt” amounts provided by law, filing a 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,” those assets can often also be better protected with wise pre-bankruptcy planning with a knowledgeable bankruptcy attorney. That planning can often allow you to file a Chapter 7 case when you might not have been able to. Or you may be able to pay less to your creditors in a Chapter 13 case.
Practical Reasons to Get Legal Advice Early
If you sell, spend, or borrow against your assets before filing bankruptcy, most of the time those assets would have been completely protected if you’d kept them and then filed. Bankruptcy cannot protect what’s already gone.
Here’s a common sense question to consider: if you’re thinking about spending, selling, or borrowing against any of your assets, do you know whether that asset is one which would be protected in bankruptcy? Might it not make more sense to preserve that asset instead of in effect giving it to your creditors?
Consider a couple scenarios.
A person who’s spent a decade or two or more building up a retirement fund cashes in or borrows against that fund 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 his or her entire retirement years, with no tangible benefit to show for it.
Or consider a husband and wife selling one of their vehicles on the assumption that they’ll lose it once they file bankruptcy, in order to use the proceeds to pay creditors that could be—and eventually are written off in bankruptcy. They may be left with one vehicle when their family really needs two, and that vehicle may start breaking down so that it won’t reliably get them to work. The decision to sell one vehicle would have led to anything but a fresh start for them.
The retirement plan above, and the sold vehicle, both could have almost certainly been protected through either Chapter 7 or Chapter 13, possibly assisted by some asset protection planning beforehand.
Decisions about whether to use up assets can have serious long-term consequences, so they clearly shouldn’t be made without legal advice about the alternatives. But for understandable reasons and sometimes less sensible ones, people tend to get legal advice only when they are in serious trouble, and after they have made some harmful decisions. Please avoid this. Get a better fresh start by getting the necessary advice so that you can preserve your important assets before they are gone.