Today I saved a family’s home by advising them NOT to file for bankruptcy. Yes, that’s right. Bankruptcy would be a trap. This gentleman had consulted with me several years ago when he had a business problem. I had advised him that his house had too much equity. After deducting his full mortgage balance from the market value, he was entitled to a specified protected amount (“homestead exemption”). Since his equity exceeded the exemption, a bankruptcy trustee would demand payment of that non-exempt amount. If not paid by the client, the Trustee would sell the house.
He came to me today (again at the recommendation of his general attorney), having decided to close his business and file chapter 7 to wipe out his personal guarantees and credit card debt. He was proud to tell me that the house was no longer a problem because he had put it in his wife’s name.
MISTAKE. A Bankruptcy trustee will inquire if you ever owned any real estate, and if you did, what happened to it. A Trustee can reverse any transfer “for no consideration.” It does not matter if you did it for “estate planning” or because your wife wanted you to, so her house would not be at risk to your business creditors.
As a Board Certified Bankruptcy attorney I look at a case the way a Bankruptcy Trustee would. Having identified a risk that the client did not recognize, I developed a non-bankruptcy strategy for him and prevented him from “accidentally” losing his home.