Bankruptcy can be a positive step in the goal of providing for heirs and loved ones.
Most people are aware that bankruptcy is not intended to punish and impoverish bankruptcy filers. However, many people who would be better off declaring bankruptcy are still reluctant to file. There remains a stigma attached to filing for bankruptcy. Others are concerned that bankruptcy might negatively affect future finances. Parents are also concerned about the wellbeing of their children if they file bankruptcy – parents want their children to have opportunities, a good home, and the ability to go to college.
But bankruptcy does not harm the financial future of children; it improves the financial outlook for those who file. Bankruptcy even has short-term financial benefits, such as stopping creditor harassment. In addition, many personal assets in bankruptcy are exempt from creditors, meaning that a family can keep a vehicle, some equity in the home and other necessities while still getting out from under debt. Through Chapter 13 bankruptcy, a family can even keep a home that they may otherwise lose through foreclosure.
Most importantly, a bankruptcy prevents creditors from having a stranglehold on the finances of a family, allowing for a parent to save for a child’s future financial needs.
Bankruptcy can save an inheritance
In addition to other necessities, a qualified retirement plan is exempt in bankruptcy. If a parent has a job that includes a pension, 401(k) or IRA, that money will not be lost through bankruptcy. However, a person who withdraws money from a retirement account to pay off debt in lieu of bankruptcy must pay taxes and penalties for early withdrawal.
After the bankruptcy process is completed, the filer may still have a home, retirement account and car in their name. A trust set up for a child’s college expenses is also exempt. However, a person cannot set up a trust for a child in an attempt to hide assets from creditors. For parents who have saved for years for a child’s education and then fallen on hard times, however, assets in a child’s name will remain available to the child.
Benefits of creating a will or trust after bankruptcy
Essentially, bankruptcy will not ruin an estate plan; on the contrary, it can preserve one. In addition, after filing for bankruptcy, people without an estate plan may wish to create one.
Often an estate plan is thought to be for only the very wealthy. However, a comprehensive estate plan can direct where and how life insurance benefits will be used; create a trust for children, and explicitly state end-of-life care.
A bankruptcy attorney can help with finances
An experienced bankruptcy attorney can discuss questions regarding inheritances, trust funds and other assets in bankruptcy. In addition, an attorney can create or amend an estate plan to ensure that a person’s wishes and finances are in order both after the bankruptcy is complete and in the event of unexpected illness or death. Colorado residents considering bankruptcy should speak to a lawyer to discuss next steps. Call (303) 438-8477 for a free consultation to discuss in detail how bankruptcy will affect your estate plan.