For ordinary Americans, bankruptcy may be a chance to start over, but it generally means starting over from scratch, with little more than a few personal possessions and -- if they're lucky, some home equity.
But for the "well-heeled and well-advised," as one lawyer called them, bankruptcy can mean millions of dollars stashed, safe from creditors, in one of several different shelters available under current law. And even though the bankruptcy bill passed by the Senate 10 days ago contains provisions designed to restrict these strategies, experts say it appears several of them will remain viable if the bill is signed into law.
Sens. Mitch McConnell (R-Ky.), left, Orrin G. Hatch (R-Utah) at a news conference after the Senate's bankruptcy vote.
(Melina Mara -- The Washington Post)
Tighter at the Upper End|
at 12:00 AM
Three current bankruptcy benefits for the well-advised, and what would change:
Benefit: Homestead exemption.
What it does: In certain states, allows filer to shield full value of residence from creditors.
What pending bill would do: Require longer residence in state to qualify.
Benefit: Chapter 11.
What it does: Filers with debts over about $1.2 million are barred from Chapter 13. But Chapter 11, meant mainly for businesses, allows debtors to keep most post-filing income.
What pending bill would do: Allow creditors to recover post-filing income above that needed for filer's living expenses.
Benefit: Asset protection trusts.
What it does: Five states and certain foreign countries allow a person to put assets into a trust for himself, and the trust qualifies for protection from creditors.
What pending bill would do: Allow creditors to recover assets that were transferred to U.S. trusts up to 10 years earlier if fraud can be shown.
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Mandatory Counseling, A Good Idea in Theory: Michelle Singletary says the bankruptcy counseling provision in the bankruptcy bill "is there as a roadblock. It's a setup, lobbied for by banks and credit card companies, to steer people away from bankruptcy to debt repayment plans."
Tax Liens Complicate Bankruptcy Filings: Albert B. Crenshaw reminds readers that "[b]ankruptcy laws provide filers with protection from many kinds of creditors, but tax collectors generally are not among them."
These experts point to three provisions of current law that give high-rolling bankrupts benefits that don't help the poor and middle class very much.
First, and best known, is the homestead exemption. Although a federal law, bankruptcy defers to the states in many ways, particularly regarding what assets an individual filing for bankruptcy may shield from creditors. Most states allow some protection for a residence, but generally it is fairly limited. However, filers who reside in a handful of states, notably Florida and Texas, can keep multimillion-dollar houses because in those states homesteads are defined by acreage, not value.
Second are "asset protection" trusts. These are legal entities that can be established in five states and a number of foreign countries, to shield from creditors assets of the person who established the trust.
Third is a provision of law that bars filers who owe more than about $1.2 million from filing under Chapter 13 of the bankruptcy law, but allows them into Chapter 11, which is meant for businesses. Since Chapter 11 is designed to keep a business going, it allows the debtor to retain income earned after the bankruptcy filing while using only assets the he had at the time of filing to pay past debts.
Critics of the bill argued that if Congress were going to pass a law making bankruptcy less hospitable for poor and middle-income people, it ought to do the same for the wealthy.
Lawmakers did make some modest changes. But, said Henry Sommer, president of the National Association of Consumer Bankruptcy Attorneys, "I don't know if they're going to affect the wealthy very much. Most of them can plan, and they do."
One change that will likely be effective, attorneys said, applies to individuals in Chapter 11. Under the new provision, the court would examine the debtor's income, calculate how much he needs to live on, and make the rest available for creditors.
Far less effective, critics said, will be a provision that requires that in order to claim the full homestead exemption in states that allow very large ones, a debtor will have to have lived in the state at least 40 months. Otherwise, the exemption will be limited to $125,000.