Tip of the Day 11/25/2012 “Don’t Give Away Your Exemptions”

Tip of the Day 11/25/2012 “Don’t Give Away Your Exemptions”

Don’t give away your exempt property before you file bankruptcy. Your exempt property is the property you are allowed to keep when you file bankruptcy. Exemptions vary from state to state. In Indiana, you can keep $17,350 worth of equity in your home, $9,350 worth of other property, $350 cash and unlimited money in a tax deferred retirement fund or Roth IRA. Some people are tempted to give assets away before they file bankruptcy because they think that the bankruptcy trustee won’t be able to get the property if it is in someone else’s name. The bankruptcy code has special provisions to keep people from giving away their assets before filing bankruptcy. A bankruptcy trustee is appointed in every case. The trustee’s job it to find out about assets you transferred before you filed bankruptcy. The trustee can undo any transfer of property you make within 4 years before you file bankruptcy. So, it really doesn’t do you any good to try to give away your property to family members or friends to keep it from the trustee. But, what makes things worse is that if the property you gave away would have been exempt had you held onto it, it loses its exempt status when you give it away. I’ll give you an example of how this could work. Let’s say you had $100,000 in a traditional IRA. That money would be completely exempt when you file bankruptcy. The trustee couldn’t take it from you. But, if you were afraid you would lose your retirement fund when you file bankruptcy so you cashed it in and gave the money to your daughter. First of all, you would have to pay income tax on the entire amount you cashed in and a penalty if you are less than 59-1/2 years old. So you would owe maybe $30,000 in taxes. But that wouldn’t be due until you file your tax return next year. So you’ve given the entire $100,000 to your daughter and incurred a $30,000 tax bill which won’t be discharged in the bankruptcy. Then, when you file bankruptcy, the trustee is going to go straight to your daughter an demand payment of the $100,000 you gave her. If she doesn’t pay, the trustee can sue her for it. So now you are out $130,000. If you had just kept the $100,000 in the IRA, the trustee couldn’t have touched it. The lesson is, don’t give away your exempt property. You’ll be giving away your exemption. If you need advice about how to protect your exemptions in bankruptcy, call me at (812) 727-0597 or send us an email. We’re here to help keep you from getting tripped up in the bankruptcy process.

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