Horror Stories, but not from my clients!

Allow me to tell you some actual stories from the Twilight Zone of Bankruptcy. I will change the names to protect the innocent and the naive, but none of these stories involve my clients for which I will be eternally grateful. But these things do happen and they make good teaching tools.

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A Rose By Any Other Name - It is not unusual to come across a situation in which a failed business suddenly reopens with a spouse or relative as the owner, but with the original principal still in charge. The original principal will be cast in the reincarnation as merely an employee of the new entity. Sometimes it works; sometimes it doesn't. An example of a situation in which it did not can be found in the 11th Circuit Court of Appeals decision in In re Coady, decided on December 3, 2009. According to the decision, Coady had formerly been a successful real estate developer with a net worth of approximately $10 million, but an economic downturn left him $27 million in debt. While so indebted, Coady married, moved into his wife�s house, drove a car leased in her name, and for over ten years worked exclusively as an �uncompensated independent contractor� for business entities under her sole ownership. He drew no salary, but his wife allowed him to write checks in her name on the businesses� accounts to pay personal expenses. She also paid for his country club and golf club memberships, the latter of which he used to promote a golf consulting and marketing business that she owned. Although Coady had neither income nor an individual bank account, in 1999 he personally executed a $164,000 promissory note to fund a real estate development for one of the businesses. The bankruptcy court found that Coady with intent to shield his assets diverted the fruits of his labor to increase the value of his wife's business and then used those assets to support his personal lifestyle. Because he was found to be hiding his assets in the name of his spouse, Coady was denied his discharge.

Mommy Dearest - It is all to often that we come across the following scenario. Mommy is ailing and decides that if she has to go into a nursing home she wants her residence to be free from the claims of Medicare. So she transfers the real estate by deed to her son or daughter. Mommy now believes that the real estate is beyond the reach of the Medicare demons (she ignores the fact that there is 5 year look back, but that is another story). She is also blissfully unaware that at the time of the transfer son or daughter is in his or her own financial difficulties. The son or daughter files a bankruptcy petition shortly thereafter and neglects to list the property on the schedules. The trustee in bankruptcy, no dummy she, discovers that the real estate is in his or her name, worth substantial monies and ripe for sale. Son or daughter faces possible denial of the discharge in bankruptcy that he or she sought in the first place. The trustee now has an asset to sell.

There are several problems here. One, the debtor's attorney should have done a title search. Two, before the transfer Mommy should have consulted an attorney with insolvency experience. Three, Mommy should have reserved a life estate at the very least. I could go on, but the moral of the story is that anyone considering real estate transfers for the purpose of putting the real estate beyond the reach of creditors should consult a bankruptcy attorney. Most will tell you about the pitfalls. Avoid those who can tell you about their bulletproof schemes for asset protection through any device including a nominee trust.

Ingenuity - This is less of a horror story than a story of ingenuity. Debtor is in prison for dealing in drugs. His schedules indicate that before the bankruptcy he sold his house upon an order of the divorce court. His wife gets half of the equity, $250,000. But the trustee is confused. The Debtor listed another $250,000 debt to Washington Mutual allegedly secured by a mortgage on the house. It turns out that right after the sale, WAMU called the Debtor and offered a second mortgage in the amount of $250,000. The Debtor said yes. WAMU records the mortgage failing to discover that the house had already been sold. The Debtor takes the $250,000 and spends it on drugs. Wow! Too bad WAMU is not still around, I have a bridge to mortgage. ;-)

Here Today, Gone Tomorrow - Imagine if you will that a potential client visits a bankruptcy attorney. He is advised that he must disclose all his assets in the paperwork that he will be required to fill out. In the midst of the conversation, he discloses that he owns two Harley Davidson motorcycles each worth about $15,000 and neither is financed. He learns that while he may use his exemptions to keep one, he may lose the other because the trustee in bankruptcy will want to sell it. He tells the bankruptcy attorney that he simply will not list it on his schedules whereupon the attorney tells him the consequences of filing false schedules, concealing assets and the possible criminal consequences of his deception. At this point potential client is at a crossroads: full disclosure or lying. Some will opt for the latter; some will get up and go see another bankruptcy attorney to whom they will not disclose all their assets. It happens, but lying, concealing assets or filing incomplete schedules is a recipe for disaster. It is surely a way to become a guest of the federal government for up to 5 years. Don't do it.