Bankruptcy--An Overview

As a last resort in your asset protection plan, you may have to file for bankruptcy. Therefore, it is important that you have a basic understanding of the bankruptcy code in order to properly structure your exempt assets.

On October 17, 2005, a new federal bankruptcy law took effect, bringing sweeping changes to a system that critics claimed was being abused by too many people for too long. Moreover, the corporate scandals of the late 1990s and early 2000s uncovered ways that the wealthy could game the process to protect their wealth, and this too served as a springboard for change. The goal of the reform measure was to force those who had the means to repay their debts instead of wiping them away.

So now a means test will be used to determine which debtors should enter a repayment plan and which should be allowed a clean slate or fresh start. If a debtor's income exceeds the means test, a presumption of fraud exists and the liquidation option under bankruptcy is not available.

To further restore personal responsibility and integrity to the system, a debtor's attorney in a bankruptcy filing must attest that the petition is well grounded in fact and that the attorney has no knowledge after a reasonable inquiry that the information presented is incorrect. Violation of this standard could result in civil penalties for the attorney.

In some cases, you may be able to discharge most or all of your unsecured debts, such as credit card debts, while preserving all of your assets. In addition, at times, the most efficient way to eliminate a portion of a lien may be to file a bankruptcy action.

Generally, the bankruptcy code follows the rules on eliminating liens that impair exempt assets. In addition, however, the bankruptcy code allows for the elimination of certain liens that impair exempt property that cannot be eliminated in a state court proceeding.

Then, once you understand the lien elimination rules, we'll examine the types of bankruptcy filings available to small business owners and their implications. There are major differences among Chapter 7, Chapter 13 and Chapter 11 filings, as well as the eligibility for each of them.

Finally, before filing such an action, you'll want to consider the after-effects of bankruptcy for you and your business.