Keeping Some Hiding Places
Sunday, March 20, 2005
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.
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.
"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.