Debtor Misconduct Foils Asset Protection Planning

If property is absolutely and totally exempt from creditors, there is no way that creditors can get at that property, right? Wrong.

The law between creditors and debtors is not always kind when you are the debtor, especially when the debtor does not have “clean hands.”

Generally, the law tries to protect a debtor from utter destruction by providing certain amounts of exempt property. Still, a particularly difficult debtor isn’t going to maintain such good graces from the court system if he or she fails to understand their role and do as told. Consider the case of In re Wilson, 2012 WL 1856587 (Bkrtcy.D.Dist.Col., Unpublished, May 21, 2012).

The case is discussed in a recent Forbes article titled “Wilson: Surcharge Of Debtor's Exempt Property Based On Debtor's Contempt In Refusing To Assist Trustee In Sale Of Property.” It is a classic example of what happens when “exempt” property isn’t actually exempt if you don’t follow the rules.

Essentially, Wilson co-owned property with another as joint tenants, but neither one of the owners listened to the court. Wilson failed to show up for an examination and, when the court tried to work around him by trying to discuss the necessary sale of the co-owned property with the other owner, the co-owner also ignored them. To make matters worse, both co-owners then ignored an order to compel coordination.

Note: civil disobedience is not a successful strategy with a bankruptcy court. While Wilson and the co-owner’s disobedience initially saved the property from sale, it didn’t stop the U.S. Marshall from seizing the property and changing the locks.

Thereafter, the realtor sold the property and the trustee moved for sanctions against both Wilson and the co-owner, assessing the debt against their otherwise exempt property (and the co-owner against the sale of the shared property).

Teaching point: the purpose of “exempt property” is to keep it from the grips of creditors. Sanctions are particularly potent, so don’t antagonize the court.

It is important to understand and appreciate your role and rights as a debtor, as well as the various powers of the court over you.

You can learn more about asset protection on our website. Be sure to sign up for our free e-newsletter to stay abreast of issues like these that could affect you, your loved ones and your estate planning.

Reference: Forbes (May 26, 2012) “Wilson: Surcharge Of Debtor's Exempt Property Based On Debtor's Contempt In Refusing To Assist Trustee In Sale Of Property

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