Asset Protection Strategies for Those Considering Bankruptcy

Making the decision to file for bankruptcy can be stressful and overwhelming. However, it may give you peace of mind to know that there are certain asset protection strategies during bankruptcy you can use to safeguard your home and certain possessions. By using exemptions, trusts, and other tools, you may be able to shield your assets from creditors while still being able to move forward to a fresh start.

Key Takeaways

• There are asset protection strategies during bankruptcy that can be used to safeguard your home and certain possessions.
• Connecticut residents filing for bankruptcy can protect up to $250,000 in equity for their primary residence ($500,000 for married couples filing jointly), which is significantly higher than the federal exemptions.
• Creditors cannot seize all personal belongings in bankruptcy, Exemptions exist for essential items such as household appliances, furniture, clothing, wedding rings, and occupation-related tools. There is also a $1,000 “wild card” exemption which can be applied to property that would not otherwise qualify for one.
• In order for a trust to effectively protect assets, it must be created well before bankruptcy is imminent. Assets transferred shortly before filing will be viewed as “fraudulent transfers” by the bankruptcy trustee.

Utilize the Homestead Exemption

When filing for bankruptcy, it’s important to understand that there are many assets that are protected from creditors under both federal and state law. Importantly, there is a crucial exemption in place for real estate that serves as your primary residence.

Under the homestead exemption in Connecticut, a homeowner filing for Chapter 7 or Chapter 13 bankruptcy may protect up to $250,000 in equity in their primary residence. For married couples filing jointly, the exemption doubles to $500,000. This significantly exceeds the federal exemption of $31, 575 for individuals and $63,150 for married couples.

Notably, there are a few caveats to be aware of when it comes to using the homestead exemption as an asset protection strategy during bankruptcy. In a Chapter 7 bankruptcy, the bankruptcy trustee is permitted to sell your property, pay off your remaining mortgage, provide you with the exempt amount, and use the remaining proceeds to pay creditors. This means if you’re looking to avoid losing your home in bankruptcy, the homestead exemption must cover the equity in full. In contrast, by filing Chapter 13, you are permitted to keep your home regardless of how much equity you have, provided you pay your unsecured creditors (like credit cards and personal loans) at least the value of any nonexempt equity over the course of the repayment plan. That’s not necessarily a bad result, since such payments may be significantly less than 100%.

Use the Personal Property Exemption

Although they have many rights when it comes to collecting on unpaid debts, creditors are not permitted to take everything you own when you file for bankruptcy. The bankruptcy law carves out exemptions for a wide range of every day belongings and personal property, including the following:

• Household appliances
• Food
• Necessary clothing and apparel
• Furniture and bedding
• Motor vehicles up to $7,000
• Burial plots
• Wedding and engagement rings
• Tools, books, and instruments necessary for your occupation

Additional exemptions include public benefits, court-approved child support payments, and health and disability insurance payments. Unlike other jurisdictions, Connecticut does not impose a specific dollar amount limit on household goods and other personal belongings that fall into the exempt categories. However, there is a $1,000 “wild card” exemption that can be used to protect property that would not otherwise be considered exempt.

Set Up Asset Protection Trusts Well Before Bankruptcy

A trust can be a useful asset protection strategy during bankruptcy, depending upon the type of trust and when it was created. Generally, an asset protection trust must have been established well before bankruptcy was imminent. It cannot be used to protect assets if it was created after creditor claims arose. If you transfer assets into a trust in an effort to shield them from creditors shortly before filing for bankruptcy, this will be considered a “fraudulent transfer” under the bankruptcy laws.

An asset protection trust is more likely to be upheld during bankruptcy if it was created as part of an estate plan long before financial difficulties began, and you do not retain control of the trust. In determining whether the transfers into the trust qualify as “fraudulent transfers,” a bankruptcy trustee would evaluate a variety of factors, including whether all valuable assets were transferred into the trust and whether the transfer was concealed.

Leverage Retirement Accounts and Education Savings Accounts

Certain types of financial accounts receive protection from bankruptcy under both state and federal law. Qualified retirement plans are typically safeguarded from creditors and cannot be used to repay your debts, as long as they meet certain requirements. Such accounts can include:

• 401(k)s
• 403(b)s
• Pension plans
• Profit sharing accounts
• Simple IRA
• SEP-IRA
• Most rollover IRAs
• Traditional and Roth IRAs up to $1,512,350 per person

Similarly, the law also protects 529 plans during bankruptcy depending upon the timing of the contributions. These types of accounts are typically protected when the funds were deposited two years or more before filing for bankruptcy, and the account beneficiary is a qualifying family member such as a child, step-child, grandchild, or step-grandchild. Any contributions made into the account within 365 days of filing for bankruptcy may be included in the bankruptcy estate.

Contact an Experienced Connecticut Bankruptcy Attorney

If you are concerned about asset protection strategies during bankruptcy, it’s vital to consult with a skilled bankruptcy attorney who can best advise you. At Lawrence & Jurkiewicz, our bankruptcy attorneys are committed to providing you with the counsel you need at the time you need it most. We will work closely with you to identify the best options in your specific situation. We welcome you to contact us for a free consultation or call us at (860) 264-1551.