Asset Protection or Bankruptcy?

Bankruptcy is extremely misunderstood, today more than ever, as more and more people are turning to attorneys seeking its protection. The concept behind Bankruptcy (or BK as it’s called), is simple: to create a fresh start without the burden of an overload of debt. The notion is honorable and the effect of getting out from under crushing debt can be dramatic. Some of the greatest success stories in our popular culture include a phase of bankruptcy and a dramatic recovery.

The problem is that the protections offered in bankruptcy are more difficult to use than ever before. For one, The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 made it much more difficult to access the protections of BK.  This Act was crafted by the banks and credit card companies to make it more difficult to get BK protections. Not to mention, that if you talk to most BK attorneys, they will tell you that the least likely place to be left with any of your assets is in front of a Bankruptcy Trustee.

To add to the problems of using BK, my experience in witnessing clients attempt to access the protection have been disheartening.  What I have seen is that if there are any real assets in the estate, the bankruptcy court someone finds a way to appoint an outside law firm to administer the estate.  Magically, this firm has lots and lots of work to do and ends up billing the BK court (who has the authority to pay) a major portion of the available assets. Now I am not saying that it is a scam, but it does strike me as rather suspicious that virtually every client I have seen go through the bankruptcy process has come out with more debts and fewer assets than they had going into it.  My personal recommendation is to almost never attempt to use bankruptcy!

So what about Asset Protection? Asset Protection works from the opposite side of the equation. Instead of laying all your assets on the table in front of a bankruptcy court and hoping for the best, asset protection focuses on protecting your assets directly from collection efforts. The outcome is often far better since many creditors choose to settle with you for far less than the total obligation just to avoid having to fight through your structure, even if they think they can. And with a good plan that is a BIG IF!

A properly drafted asset protection plan in many cases will be virtually impenetrable to a judgment creditor and they will be happy walking away with almost nothing. Try getting that outcome in a bankruptcy court.  Not to mention you avoid inviting a bankruptcy judge or trustee into your financial house, and avoid the potential of having the bankruptcy court assigning a law firm to your case to ‘administer’ it to the tune of tens of thousands of dollars.

The bottom line is that if you are in a position to consider bankruptcy, I would strongly recommend that you also get an analysis around the options that may be available to you through asset protection. Each situation is very different and the options available will depend on the specific facts of your case.  But Knowledge is Power, so do yourself the favor of getting all the information you can.