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Why Bankruptcy? Why in the world would estate planning attorneys write a newsletter about bankruptcy?
Aren’t all estate planning clients comfortable, well-to-do, or wealthy? The answers is "It Ain’t Necessarily So".
Business and professional people get in financial trouble and want to know how the laws work if worse
comes to worst.
A New Bankruptcy Law. The President recently signed a new bankruptcy law, which changes the rules for
personal bankruptcy and may make it more difficult for individuals to go through bankruptcy for the purpose of
shedding creditors and debt, while preserving assets or earnings. While no one wants to talk about
bankruptcy as a possibility, it is worthwhile to summarize some of the recent changes which will impact
individuals seeking bankruptcy protection.
Bankruptcy is a bad word, something none of us wants to contemplate. However, the purpose of the
bankruptcy laws originally was to wipe out debt and permit individuals to start their lives over again (instead of
sending them to debtors prisons that we read about in the Dickens novels). The new Bankruptcy Act makes it
harder for a debtor to walk away with assets and earnings, while shedding large debts. Pertinent provisions
which may affect client’s planning involve some of the following:
Income. Individuals with compensation above the median may have to devote a share of their income to
paying creditors for a period of five years after the bankruptcy. Heretofore, highly compensated individuals,
such as physicians, could wipe out debt and keep earning seven figure income without paying creditors.
Forum Shopping. Under the old law, individuals could change their domicile just before a voluntary
bankruptcy filing in order to take advantage of more favorable state laws in a new state of domicile.
Prominent, wealthy individuals moved to Florida, for example, to take advantage of unlimited protection for a
personal residence. It is now more difficult to shift domicile to qualify for better exemptions under state law.
There is now a two-year look back. If a debtor has change domicile within two years of a bankruptcy filing,
state exemptions will be based on the six month period immediately preceding the two year look back period.
As a result of the new law, considerably more care and advance planning will be required if there is a threat of
personal bankruptcy.
Retirement Plans. The new Bankruptcy Act eliminates some of the uncertainty about exemptions for
retirement plans. There is now a federal exemption of up to $1.0 million for retirement plans. The limit will not
apply to SEP or simple IRA accounts. There may be question under the law whether ROTH IRA’s qualify for
the federal exemption. However, in Michigan ROTH IRA’s are exempt along with other retirement accounts
without a limitation (one exempt account per person.).
Transfers in Trusts. There is a new two-year look back for transfers by the debtor. There is a ten-year look
back for "self settled" Trusts where the debtor is a beneficiary and made the transfer with "actual intent to
hinder, delay or defraud" a creditor. These terms are defined and will remain to be seen what sorts or proof
are required of "intent" to bring the trust assets back into the bankruptcy estate. A whole new area of trust law
has been opened up to analysis and planning to say nothing of the difficult determination of which state law to
apply where a trust is created in a state other than the state of domicile.
Protected Homes. Newly acquired homes may not be fully protected. The new law limits a potential debtor’s
ability to shelter wealth in a newly acquired residence. A holding period of three years and four months is
required to protect values in excess of $125,000 (adjusted for inflation). Moreover, none of the residence may
be exempt if a debtor owes debts related to violations of various laws or an act that "caused serious physical
injury or death", even if there was not a criminal conviction. (OJ Simpson got in under the wire.) There is a new
ten-year look back if a residence is acquired with intent to defraud a creditor. Again, these provisions place a
premium on advance planning where bankruptcy is a potential option for a client’s protection.
Avoiding Bankruptcy. Under the new Bankruptcy Act, strategies to avoid bankruptcy, filed on involuntary basis
by creditors, will be important. If a debtor has twelve or more creditors, at least three are required to join in an
involuntary bankruptcy petition. Consequently, in planning business and personal affairs, it may be important
for a client to make sure that they have twelve or more creditors to avoid the possibility that a single creditor
can file an involuntary petition. This will aid considerably in the debtors negotiating posture with a large
creditor.
Bottom Line. The new Bankruptcy Act makes it more difficult to use bankruptcy as either a shield or a sword.
The weapons available to creditors have been expanded. However, bankruptcy is typically not rewarding to
creditors because of the large expenses and delays involved, so there still will be opportunities to use
planning and the bankruptcy laws as both shields and swords for debtors with large obligations and assist in
reaching a settlement with such creditors. Asset protection, discussed last month, will become especially
important and matter for careful planning where there are potential liabilities inherit in one’s business or
profession.
If you have clients who are exposed to such obligations and are concerned with asset protection, please
contact Jim Modrall or David R. Appleford, JD, LLM (taxation) who joined our firm on April 4, 2005 at 231-941-
9660. We have attorneys who specialize in bankruptcy work who can provide assistance when needed.
©BRANDT, FISHER, ALWARD & ROY, P.C.
This newsletter is provided for informational purposes and should not be acted upon without professional
advice.
Aren’t all estate planning clients comfortable, well-to-do, or wealthy? The answers is "It Ain’t Necessarily So".
Business and professional people get in financial trouble and want to know how the laws work if worse
comes to worst.
A New Bankruptcy Law. The President recently signed a new bankruptcy law, which changes the rules for
personal bankruptcy and may make it more difficult for individuals to go through bankruptcy for the purpose of
shedding creditors and debt, while preserving assets or earnings. While no one wants to talk about
bankruptcy as a possibility, it is worthwhile to summarize some of the recent changes which will impact
individuals seeking bankruptcy protection.
Bankruptcy is a bad word, something none of us wants to contemplate. However, the purpose of the
bankruptcy laws originally was to wipe out debt and permit individuals to start their lives over again (instead of
sending them to debtors prisons that we read about in the Dickens novels). The new Bankruptcy Act makes it
harder for a debtor to walk away with assets and earnings, while shedding large debts. Pertinent provisions
which may affect client’s planning involve some of the following:
Income. Individuals with compensation above the median may have to devote a share of their income to
paying creditors for a period of five years after the bankruptcy. Heretofore, highly compensated individuals,
such as physicians, could wipe out debt and keep earning seven figure income without paying creditors.
Forum Shopping. Under the old law, individuals could change their domicile just before a voluntary
bankruptcy filing in order to take advantage of more favorable state laws in a new state of domicile.
Prominent, wealthy individuals moved to Florida, for example, to take advantage of unlimited protection for a
personal residence. It is now more difficult to shift domicile to qualify for better exemptions under state law.
There is now a two-year look back. If a debtor has change domicile within two years of a bankruptcy filing,
state exemptions will be based on the six month period immediately preceding the two year look back period.
As a result of the new law, considerably more care and advance planning will be required if there is a threat of
personal bankruptcy.
Retirement Plans. The new Bankruptcy Act eliminates some of the uncertainty about exemptions for
retirement plans. There is now a federal exemption of up to $1.0 million for retirement plans. The limit will not
apply to SEP or simple IRA accounts. There may be question under the law whether ROTH IRA’s qualify for
the federal exemption. However, in Michigan ROTH IRA’s are exempt along with other retirement accounts
without a limitation (one exempt account per person.).
Transfers in Trusts. There is a new two-year look back for transfers by the debtor. There is a ten-year look
back for "self settled" Trusts where the debtor is a beneficiary and made the transfer with "actual intent to
hinder, delay or defraud" a creditor. These terms are defined and will remain to be seen what sorts or proof
are required of "intent" to bring the trust assets back into the bankruptcy estate. A whole new area of trust law
has been opened up to analysis and planning to say nothing of the difficult determination of which state law to
apply where a trust is created in a state other than the state of domicile.
Protected Homes. Newly acquired homes may not be fully protected. The new law limits a potential debtor’s
ability to shelter wealth in a newly acquired residence. A holding period of three years and four months is
required to protect values in excess of $125,000 (adjusted for inflation). Moreover, none of the residence may
be exempt if a debtor owes debts related to violations of various laws or an act that "caused serious physical
injury or death", even if there was not a criminal conviction. (OJ Simpson got in under the wire.) There is a new
ten-year look back if a residence is acquired with intent to defraud a creditor. Again, these provisions place a
premium on advance planning where bankruptcy is a potential option for a client’s protection.
Avoiding Bankruptcy. Under the new Bankruptcy Act, strategies to avoid bankruptcy, filed on involuntary basis
by creditors, will be important. If a debtor has twelve or more creditors, at least three are required to join in an
involuntary bankruptcy petition. Consequently, in planning business and personal affairs, it may be important
for a client to make sure that they have twelve or more creditors to avoid the possibility that a single creditor
can file an involuntary petition. This will aid considerably in the debtors negotiating posture with a large
creditor.
Bottom Line. The new Bankruptcy Act makes it more difficult to use bankruptcy as either a shield or a sword.
The weapons available to creditors have been expanded. However, bankruptcy is typically not rewarding to
creditors because of the large expenses and delays involved, so there still will be opportunities to use
planning and the bankruptcy laws as both shields and swords for debtors with large obligations and assist in
reaching a settlement with such creditors. Asset protection, discussed last month, will become especially
important and matter for careful planning where there are potential liabilities inherit in one’s business or
profession.
If you have clients who are exposed to such obligations and are concerned with asset protection, please
contact Jim Modrall or David R. Appleford, JD, LLM (taxation) who joined our firm on April 4, 2005 at 231-941-
9660. We have attorneys who specialize in bankruptcy work who can provide assistance when needed.
©BRANDT, FISHER, ALWARD & ROY, P.C.
This newsletter is provided for informational purposes and should not be acted upon without professional
advice.
| WEALTH CONSERVATION: PROFESSIONAL ALERT Brandt, Fisher, Alward & Roy, P.C. |
| If you would like to receive future editions of the monthly Wealth Conservation Newsletter directly to your e-mail account, please e-mail our office using the following link: Estate Planning Newsletter |
| Brandt, Fisher, Alward & Roy, P.C. Attorneys at Law |
| June 2005 BANKRUPTCY ANYONE? by James R. Modrall III, J.D., C.P.A., David R. Appleford, J.D., L.L.M. (Taxation) |