The common misconception is that you’ll have to give up all of your possessions if you declare bankruptcy. But that’s a typical misunderstanding.
In bankruptcy, assets can be kept safe from creditors if they’re ‘exempted’ from being sold off. The exemptions that are available are a big part of whether or not you can protect your assets during bankruptcy. Also, you can use either the state’s or the federal government’s tax exemption system. Not all items on these lists can be combined, so finding a system that covers your most valuable possessions is crucial.
In many cases, only particular kinds of property qualify for exemptions. Your home, car, and other possessions might all be safe under an exemption. It may be possible to protect only a specified fraction of an asset’s value, or the entire asset’s value, depending on the circumstances. Some forms of property may require a ‘wildcard exception’ to be protected if no other exemptions apply.
Luckily, this post will answer questions like: ‘How to protect assets in the case of bankruptcy?’ and ‘What property can I protect in bankruptcy?’. Keep on reading to learn more.
Do I Have To Give Up All Of My Property And Possessions Upon Declaring Bankruptcy
When you declare bankruptcy, you won’t necessarily lose everything you own. Bankruptcy is often better to protect your assets than not paying your bills and having your house foreclosed on or your car repossessed. Filing for bankruptcy has a negative connotation, and many individuals worry that they’ll have to give up all they own to start over. Sadly, this is a common misunderstanding of the bankruptcy process.
Protecting Your Assets During Bankruptcy
Bankruptcy proceedings pose grave risks to assets. The chance of losing everything in bankruptcy court also increases in proportion to the number of assets you have accumulated. Some common strategies for avoiding bankruptcy and safeguarding your assets are as follows:
- Asset Conversion
Most people think of bankruptcy as a ‘fire sale’ of their possessions and personal belongings, but this isn’t how it works.
Chapter 13 bankruptcy is an option for people and organizations with a regular income source and whose debts don’t exceed a set threshold. When you file for Chapter 13 bankruptcy, you get to keep everything you own, and creditors, foreclosures, and lawsuits can’t come after you.
Instead of taking and selling your non-exempt assets to pay off your debts, the bankruptcy court will look at your income, debts, and spending and work with you to make a new repayment plan that you can afford. The petitioner pays one lump sum for three to five years. When the payment plan is finished, any remaining debt is erased (forgiven).
Those who meet the following requirements can file for Chapter 13 bankruptcy:
- Debts (credit cards, personal loans, and school loans) total less than US$394,725. Once every three years, this figure is adjusted.
- Have unsecured debts totaling less than US$1,184,200 (home, vehicle). The sum shifts every three years as well.
- You should have a reliable source of income that gives you the freedom to pay your debts and make adjusted payments on your debt.
Those who file for bankruptcy and stick to their repayment plans can keep all of their possessions, including their home, even after the case is over.
- Setting Up An Irrevocable Trust
When you set up an irrevocable trust, you give up control of your property and give it to someone else to keep it safe. Your legal claim to the trust’s assets is effectively terminated. The beneficiary must provide consent to any changes or terminations of the trust. The main benefit of a grantor’s discretionary trust is that its assets are not part of the grantor’s taxable estate.
An irrevocable trust can be useful when considering a bankruptcy case. With this, your assets are no longer yours because you no longer have the authority to claim them. In most cases, this means they’re unavailable to debt collectors.
Yet timing may be an issue, so keep that in mind. A court could cancel the trust if the person who set up the trust transfers assets while still owing money. If you regain ownership of the assets, your creditors may file a claim against them again.
- Debt Relief Scheme
In a Chapter 7 bankruptcy, it’s against the law to hide, sell, or change ownership of assets to keep them from being liquidated. Petitioners worried about losing assets should look into alternatives to Chapter 7 bankruptcy, as there are ways to protect certain properties during bankruptcy.
You can hire a debt relief lawyer to work out a payment plan and/or lower payoffs with creditors, dispute or challenge bad or illegal debts, or file for Chapter 13 bankruptcy. A skilled bankruptcy lawyer can help you reduce debt, stop creditors from bothering you, protect your financial reputation, and keep your assets from being sold.
- Availing Of Homestead Exemptions
Homestead exemptions are available in some states and protect the equity in your primary residence from bankruptcy. Exemption amounts for primary residences are statutorily capped at different levels in different states. The value of your home is protected from creditors no matter how high it may rise if the cap is infinite, as is the situation in several states.
Bottom Line
Avoiding legitimate creditors or evading financial commitments isn’t the point of asset protection when filing for bankruptcy. The objectives are to protect assets from predatory litigants or unwarranted creditor demands.
In the event of a lawsuit, a judgment, or any other claim against any individual’s personal or business assets, they have many protective measures to take like asset conversion, irrevocable trusts, debt relief, and homestead exemptions. At the end of the day, knowing how to protect your wealth from legal action and reviewing your options with your financial advisers are prudent.
