"This says the full multimillion-dollar exclusion is available to longtime residents . . . but not to the recent carpetbagger," said Harvard law professor Elizabeth Warren, a critic of the bill.
In fact, noted Sommer, one type of person who might now get caught is a retiree who moves to, say, Florida, buys a big house and then gets sick and is forced into bankruptcy by medical bills.
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)
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Tighter at the Upper End
From
washingtonpost.com
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."
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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."
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And barely grazed by the bill, critics said, is one of the biggest and best shields available to those who know how to play the game, the asset protection trust.
For decades, many wealthy individuals expecting trouble -- from creditors, ex-spouses, failed businesses -- have been transferring assets to these trusts. But until recently, they had to go offshore to one of a number of countries with permissive laws, where a properly drawn trust is almost completely out of reach for claims from creditors in the United States.
More recently, a handful of states in this country have changed their own laws to make it easier for the well-to-do to use trusts to shield assets from creditor claims. As long ago as 1997, Delaware and Alaska enacted such changes, followed since by Nevada, Utah and Rhode Island. The states have argued that allowing such trusts prevents revenue that they generate from going abroad.
Continuing to allow U.S.-based asset protection trusts to shield assets from creditors in bankruptcy is "an ugly loophole that protects millionaires," Sen. Charles E. Schumer (D-N.Y.) said in a floor statement.
Just before approving its version of the bill, the Senate did adopt an amendment that would make it harder to use a domestic asset protection trust to defraud creditors. The measure would allow a bankruptcy court to review transfers to an asset protection trust going back 10 years and, if fraud can be shown, to return the assets to pay creditors.
Its sponsor, Sen. James M. Talent (R-Mo.), said it allows the court to "break open the trust" to get at money and other assets placed there to escape creditors.
But Schumer and others dismissed this change as ineffective, because proving fraud is too difficult.
On its face, it sends "a clear signal from Congress" to states engaged in a "race to the bottom" to attract new trusts, "that self-settled domestic trusts are not a good thing," said Jack Williams, director of financial recovery services at the accounting firm BDO Seidman LLP. But the "weakness is that it is still a matter of proof. The bankruptcy trustee still has to show the debtor engaged in fraud with the intent to hide, delay or defraud creditors. It's a facts and circumstances test," which is expensive to show and usually is based on circumstantial evidence, Williams said.
