How To Protect Your Assets From Bankruptcy
Unfortunately for many consumers who get in over their heads with finances, bankruptcy isn't quite the clean slate that some think it is -- especially if you don't qualify for Chapter 7 bankruptcy and you have to file for Chapter 13 bankruptcy.
In many cases, some of your assets will be liquidated to help pay off what debt there is. Only after some of your debts have been discharged (or partially discharged) will your remaining debt be wiped away -- if you aren't required to set up a payment plan.
So, if you might be required to liquidate some of your assets, what can you do to protect your money? Assets that can't be touched vary by state, and often include your home and your primary vehicle for getting to work. You will have to check your state law to see what assets are protected during bankruptcy.
Here are two ways to protect your money in bankruptcy:
In many states, the money in your ERISA-qualified retirement plan is safe. Not only can the money you keep in your account be protected, but your contributions may come with a tax advantage. Contribute to a retirement plan as part of your regular finances, and your money might be safe.
Transfer of Assets
During bankruptcy you might be protected if the assets aren't technically yours. In some states, if you transfer your assets to someone else, or transfer them so that another entity -- like a trust -- owns them, they are protected from bankruptcy. You can transfer your assets to a business or a trust, and see a measure of protection.
The Catch: Plan Ahead Before You Get Into Trouble
Before you increase your retirement account contributions or transfer all of your money to a trust in order to protect your assets during bankruptcy, realize that you can't make these moves if you are already deep in debt. If you suddenly increase your contributions, or try to transfer your assets to another person, business, or trust just before filing for bankruptcy protection, you will get into big trouble -- and your assets may not be protected after all.
You aren't supposed to use these strategies as a stop-gap to keep from paying what you owe creditors. Instead, if you want the money protected just in case, you need to engage in long-term financial planning well ahead of time.
Before you make any moves, consult with a knowledgeable attorney, financial planner, or accountant who can help you weigh the pros and cons of your decision. You will also reduce the chance of running into pitfalls later.