Experiencing financial hardship? What assets should you use first in case bankruptcy happens?

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When people find themselves in tight financial times, one of the things they start to do is liquidate assets ... they start selling things and cashing in investments. While that can make sense, people should plan how they use the assets they have available. Many times selling things just isn't enough.

So, why does it matter what a person sells? It matters because some assets can be protected in a bankruptcy and others cannot. So if a people cannot prevent bankruptcy with the property they own, I suggest it is better to save the things that can be protected in the bankruptcy.

The main asset and easiest asset to tap is usually a retirement account. Retirement accounts can be substantial. The problem with withdrawing money early is the cost to do it. First a person probably needs to pay the taxes on the money. Then they must pay a penalty. Usually, a person who withdraws $4,000 from his or her retirement account keeps only about $2,200 in cash. The rest is consumed by taxes and penalties. In bankruptcy, this money is usually 100% safe.

Some equity in homes can be protected. Investment  property may not be safe from the trustee. This is an area of consideration as a source funding people use. Home equity loans and second mortgages take equity out of your home. Once you use your property as collateral for a loan, it will probably need to be paid. By maxing out your home, a person uses value he or she could have protected in bankruptcy.

The recent event that caused me to consider this topic was a recent consultation. I met with a woman who started having financial trouble a couple years ago after a major illness, which resulted in temporary disability and long term limitations on her ability to work. When she entered her financial downturn, she had a decent retirement fund, a home and a rental property with several apartments and a commercial space.

Like many people, the first asset she liquidated was her retirement fund. She spent that down to zero. Then she worked looked into a home equity loan and mortgage modification. That wasn't working and she was in fear of foreclosure. Meanwhile, her rental property was earning enough to pay for itself and  even giving a small return.

If I could have met with her before she started doing anything, I think I would have reserved the retirement money, discussed the potential sale of the home, and explore the possibility of moving into an apartment in the rental property making it her home. That may have been a complete solution ... and maybe not.

I do not know if this would have worked. My point is, I did not get the impression this option or any other options were considered. Dealing with debt can be complex. Planning earlier may be able to help to minimize the damage.

If you want assistance, legal representation, or just want to know more about Mark M. Medvesky or Wells, Hoffman, Holloway & Medvesky LLP, check out our website at www.whhmlaw.com.

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