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Your Estate Plan

PERSONAL FINANCIAL PROBLEMS CONTINUE TO LEAD TO RESTRUCTURING AND THE NEED FOR ASSET PROTECTION AND BANKRUPTCY COUNSELING

By Earl H. Cohen, Attorney, Mansfield Tanick & Cohen

In this issue we will discuss another important aspect of Estate and Wealth Transfer and Preservation Planning-bankruptcy planning. While it may seem odd to discuss bankruptcy planning in the same context as estate planning, the two are often the flip side of the same coin. It is impossible to discuss and counsel clients on the protection of their assets and preservation of their estates without considering bankruptcy issues and planning. This recession has seen a significant increase in the number of clients with significant net worth having to consider bankruptcy for either business or non-business reasons.

With over 1.1 million bankruptcy filings in 2008, the US has seen a 32% increase in filings over 2007 and the highest level of filings since 2005. In that year there were approximately 1 million individual filings and over 64,000 company filings. The company filings increased over 50% from the prior year. In 2009, bankruptcy filings by public companies increased 26% over the prior year with 82 public companies filing for bankruptcy protection. The filings included Lehman Brothers, Washington Mutual and many high profile retailers.

The growth of individual bankruptcy filings has been fueled not only by unemployment, but catastrophic health costs, investment plans gone bad and business failures have all contributed to the problem. In many cases, individual filers sought to maintain their lifestyle by tapping the equity in their home and using high interest credit cards. Many found themselves unemployed and believed that they could replace their job quickly at the same salary. In the meantime, they were unable to reduce their individual spending and found themselves getting further in debt each month. Finally, many, including consumers with six or seven figure net worth, found there was no place to turn other than bankruptcy protection.

For those finding themselves facing possible financial problems, there are several steps that should be explored prior to proceeding with the filing of a bankruptcy petition:

• Be prepared: If you are still working, prepare your security plan. This includes eliminating your credit card and other high interest debt, reducing your spending to “needs” (eliminating the “wants”) and increasing your savings so that you have enough available cash to cover your immediate living expenses for a minimum period of six months.
• Reduce and negotiate: If you do lose your job or suffer a significant reduction in pay.
  • Be prepared to reduce your family expenditures as quickly as possible to a level consistent with your income. This will mean eliminating the “wants”.
  • Begin negotiating with your creditors to reduce interest rates or payments or both and consider negotiating and compromising outstanding debt. Credit card issuers have learned that receiving fifty or sixty percent of the principal balance is better than zero percent.
• Find a competent bankruptcy attorney: If you have lost your job or have suffered some other financial catastrophe, it is best to face the problem head on and seek competent counsel to discuss your options. Those options may include:
  • Negotiating an out of court settlement with all of your creditors for cash or a relatively short payment period of six months or at most a year.
  • Plan for an out of court reorganization of your assets and liabilities to include a sale, transfer, or assignment of your assets to cover your debts.
• Dissolution: If you are the owner and operator of a business and your debts make it difficult to continue in business, and you have not guaranteed the company’s debts, it may be possible to liquidate all of the assets of your company and as part of the dissolution of the company, pay your creditors each a proportion of their share of the outstanding debt from the sale of your assets.

For some consumers, personal bankruptcy may be the only logical alternative. However, since 2005 not everyone with debt problems qualifies to file for bankruptcy protection. Those filers whose debts are primarily consumer (as opposed to those with primarily business debts) must provide the results of a means test and show that their income is lower than the national median and that they have no money left over at the end of each month to fund a Chapter 13 plan. Those who do qualify for bankruptcy relief may still find that some of their debts will not be discharged. Federally guaranteed student loans, most taxes and support obligations are among those debts that are not dischargeable.

Individuals considering bankruptcy are well advised to seek the advice of an experienced bankruptcy attorney who can properly analyze their financial situation and advise them on the appropriate solutions for their circumstances. Bankruptcy is one solution, but not the only solution available.

For more information on bankruptcy and alternatives available to solving financial problems call Earl Cohen, Steve Rose or Jeff O’Brien at the law firm of Mansfield Tanick & Cohen at 800-4016-194.