Forbes Article Discusses Risk Of Chapter 7 Bankruptcy By Wealthy

I read an article in Forbes online which discusses a bankruptcy case that set aside several fraudulent transfers. The case illustrates why debtors with asset should avoid filing bankruptcy.

In this case a debtor tried to protect personal assets before filing bankruptcy by, among other things, conveying a non-exempt real property to his spouse for no consideration, and he attempted to protect a business by transferring business assets to a new business and attempted to characterize the transfer as a loan. The bankruptcy court reversed these transfers as fraudulent under the bankruptcy code. There may be a challenge to the debtor’s overall bankruptcy discharge.

The Forbes article included a quote that explains why people with significant assets must avoid bankruptcy:

Arguably, the Debtor here made his biggest mistake when he filed for bankruptcy. The purpose of bankruptcy is not so much to protect the debtor as much as it is to marshal assets for the benefit of all creditors. If the debtor is cooperative, the debtor gets a discharge; if not, the discharge is denied — but in either case the marshaling of assets continues, and the Trustee has very strong powers to set aside transactions and force third-parties to cough up the goods.

Bankruptcy procedure is designed to help creditors. Bankruptcy trustees work for creditors and not the debtor. The overriding legal standard in bankruptcy law is the best interest of the creditors. Bankruptcy is not designed to protect your assets from your creditors. For people with assets, bankruptcy may seem appealing because it provides protection from lawsuits, but the appeal is deceptive. For people with assets, bankruptcy is a trap.

I have many clients who have filed bankruptcy with other bankruptcy attorneys who did not understand the simple premise that “rich people” should not file bankruptcy.

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