Monmouth County Bankruptcy and Consumer Lawyer Blog

You owe thousands of dollars to various creditors, including credit card companies and healthcare providers. However, you have a decent stash of cash that cannot be protected via an exemption and you are afraid that the court will take your cash and distribute it to your creditors. Sound familiar? We all want to hold onto our ex presidents!

Obviously, you would rather benefit from this cash reserve than have the trustee take it from you and get nothing in return. The problem, however, is that generally you cannot make large purchases prior to filing your petition. Any such payments will be considered to be a preferential payment, fraudulent conveyance and/or attempting to hide your assets from your creditors. These large purchases can be rescinded by the trustee, forcing you to give back the goods or services purchased and your estate getting back the cash for the trustee to distribute to your existing creditors. So how can you benefit from this cash reserve before the trustee gets to it and leaves you with nothing?

There are some loopholes that enable to benefit from the cash before the trustee can get to it. Some things you can do with your cash, which will give you some benefits, are:

 Setting up an Individual Retirement Account or IRA and depositing the maximum amount allowed by law (see discussion below)
 Making prepayments on car or home insurance
 Bringing your auto and mortgage payments current--and then filing your bankruptcy petition after waiting 90 days
 Paying your bankruptcy case filing-fees and attorney fees
 Obtaining needed dental or medical treatment
 Paying for needed home and car repairs
 Catching up on delinquent child support or alimony payment
 Reducing income tax and student loans
 Purchasing household supplies, groceries and other non-"luxury" needed goods
 Fund a college savings plan N.J.S.A. 18A:71B-41.1.gives NJBEST cccounts protection; 11 USC 541(b)(5) of bankruptcy code protects college saving plan money if it has been in the plan for more two years.

Hopefully, by doing these things, your cash balance will be low enough to find an exemption for it and protect it from seizure by the trustee.
Some things that you cannot do with your cash are:
 Give the money to friends or family members as gifts
 Repay personal loans to family members, friends, or personal business associates if the repayment would bring the amount repaid to that creditor for that debt to $600 or more for the year prior to the filing of your bankruptcy petition
 Repay commercial debts if the repayment would bring the amount repaid to that creditor for that debt to $600 or more for the 90-day period prior to the filing of your bankruptcy petition
 Fraudulently transferring the money to someone else's bank account without accounting for it on your own bankruptcy petition

In order to for your money to be protected when funding an IRA, there are several conditions that must be met. First, you must have been making regular contributions to your retirement account prior to declaring bankruptcy. This means you cannot put all your cash into your IRA right before bankruptcy and expect it to be protected. IRA protection only extends insofar as you weren't intentionally trying to hide money from debtors.

Secondly, your IRA assets cannot total more than one million dollars. However, any amount that was rolled over from another account, like a 401(k), received unlimited protection. Thus, you still receive the benefit of up to $1,000,000 in protection in your IRA account plus unlimited protection for rollover funds.

As with any aspect of Bankruptcy knowledge, just like your beloved cash, is KING. Lawyer up when deciding whether Bankruptcy is right for you. Your wallet and those that depend on it will thank you.

Continue reading "Cash is King: Can I still spend it going bankrupt?" »

Inherited assets which arise during bankruptcy can present issues because they are not exempt under New Jersey bankruptcy law and are subject to liquidation as part of the bankruptcy estate that is created when a bankruptcy is filed. However, there are estate-planning devices that can help to protect potential assets that may be inherited during a bankruptcy. These are called spendthrift trusts.

A well drafted spendthrift trust, along with certain built in discretionary powers to the Trustee of the Trust can fully protect assets which may be inherited during bankruptcy. This type of asset shelter can be a good idea if a loved one is in poor health, financially turbulent or facing a divorce proceedings. Also, it is a good way to leave an inheritance to family members facing bankruptcy and will provide the greatest benefit to their successors, while also protecting the money from their family member's creditors.
The law is proscribed in , which provides that an "a restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law is enforceable in a case under this title." This language preserves restrictions placed on the transfer of the debtor's interest in a trust commonly referred to as "spendthrift trusts." Section 541(c)(2) is written in such a way that a spendthrift trust does not become part of the bankruptcy estate when a beneficiary of such a trust files for bankruptcy. When an asset is not part of the bankruptcy estate (in this case a "spendthrift trust"), it is not subject to liquidation by the bankruptcy trustee, and is therefore sheltered from potential creditors.

The issue then becomes what qualifies as a "Spendthrift Trust" under New Jersey Law. A Spendthrift Trust is a trust that is structured so that it is non-transferrable by the beneficiary. This means that the beneficiary has no control over the contents (assets) of the trust, and will only receive whatever benefits the trust provides. As previously stated certain "discretionary" language may be drafted into a trust and anything that gives the trustee less than complete discretion to distribute or not, income and/or principal to any beneficiary of the trust, will effectively reduce the ability of a trustee to shield the trust assets from a beneficiary's creditors

Therefore, a spendthrift trust that qualifies under New Jersey law with complete trustee discretion is safe in bankruptcy. A spendthrift trust (without complete discretion given to the trustee) will still be safe in bankruptcy however; the protection would only apply to the corpus of the trust and not to distributions that may be made in the 180 following the filing of a bankruptcy case. Those distributions would be part of the estate, would not be exempt and would therefore be subject to liquidation by the bankruptcy trustee.

Because of the intricacies of Bankruptcy law and their interplay with Trust and Estate law, any pre-bankruptcy estate planning of this sort is best done with the advice of a qualified Bankruptcy Attorney, as well as, a Trusts and Estates attorney.If you are thinking of filing Bankruptcy our FAQ's section answers many of the questions filers might have.

Continue reading "Is My Trust Safe in Bankruptcy?" »