Escaping the Debtor’s Prison – Chapter 13 | 491

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Escaping the Debtor's Prison

Learn how escaping the debtor’s prison is an easy task if it’s done correctly! In today’s episode, discover why Chapter 13 is becoming the new debtor’s prison and what spendthrift trusts were created for.

Escaping the Debtor's Prison

What You Will Learn About Escaping the Debtor’s Prison – Chapter 13:  

  • Why Chapter 13 is becoming the new debtors’ prison
  • The Georgia court case and what spendthrift trusts were created for
  • The importance of doing things correctly

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Transcript:

Matt Theriault: Hey rock star, if you have a question here for Tim that you’d like him to answer on the show, anything tax related, anything asset protection related, go to taxhacker.com/questions. Post your question in, and then we’ll answer it live right here on Tax Hacker Tuesday. Enjoy the show.

Speaker 1: This is Theriault Media. Did you know that up to 50% of your lifetime income will be wiped out by taxes? What if you could stop this madness? Isn’t it about time you play on a level playing field with the wealthiest 1%? Now you can. Tim Berry, Attorney at Law, shares here each and every week current tactics and strategies that anyone can implement to hack the tax code. Protect your assets and keep what’s rightfully yours. It’s time for Tax Hacker Tuesday.

Tim Berry: Tim Berry with the planblaw.com again. Today I wanted to share with you an article. The article was about, “Is Chapter 13 becoming the new debtors’ prison?” Now, why was this author asking if Chapter 13’s becoming the new debtors’ prison? The reason being is that under a Chapter 13 bankruptcy, you have to agree to make payments to the bankruptcy trustee for anywhere between three to five years, and typically it’s going to be for a five year period. And really, there’s no incentive for somebody to earn more. They’re just kind of stuck on an endless treadmill for the next five years of their payments.

In fact, the way this author put it is, “Chapter 13 does not reward hard work or encourage anyone to attempt any more money, because if they earn more money …” you know, well, let’s go back to the author again. “Why would you work overtime knowing that you’ll have to give it to your creditors?” So there is no reason for getting ahead, for having and incentive, because the more you work, the more your creditors are going to be paid off on the bill. Now, sure, logically if you owe that money you should pay it back, but realistically, after two years of paying creditors and thinking that you’re going to get a clean start, and knowing that you still have to keep on going for three years and paying your money to creditors, there’s just not an incentive.

Now, this article is really interesting in that it raised up another issue, and this other issue was a court case that just came down, and this was a Georgia court case, and here’s what this Georgia court case came out and said. And it was a case of [Kenneth Rufurt Allen 00:02:25], and the interesting thing about this case, and let me give you the background on it. The background was that Mr. [Allen 00:02:34] filed a Chapter 13 bankruptcy. Now, during Chapter 13 bankruptcy, his father called him up and asked Mr. Allen to talk to the father’s attorney. The father was doing some estate planning, and what ultimately happened is the father established a trust for the benefit of Mr. Allen. So now he was the beneficiary of this trust while he was in bankruptcy. Well, the bankruptcy trustee got wind of this and said, “Hey Mr. Allen, you never told us this trust is created. You should have told us about this.”

Well, Mr. Allen comes back and says, “No, under the bankruptcy code I really don’t need to, because this trust isn’t part of the bankruptcy estate.” And so the trustee got a little bit upset, and they took him to court. And so in the bankruptcy court, the judge looked the whole thing over, and the judge basically makes the decision that no, there wasn’t really a problem with Dad creating a trust, and Dad moving Dad’s assets into this trust for the benefit of Junior. They really didn’t feel like that was a problem with it. In fact, a great line here, the judge says, “The debtor’s father was free to dispose of his property.” So the father was free to dispose of the father’s property, as the father saw fit. And a spendthrift trust is a valid legal way to dispose of his property.

So the big distinction here was, the judge was saying, “Hey, if it was the kid, the guy who filed bankruptcy who is moving his assets into a trust, yeah, we’d probably have a problem. But in this case, it was the debtor’s father who moved the father’s assets into this trust to benefit the kid.” And in fact, the judge says, “The whole purpose of a spendthrift trust is to protect the beneficiary from his own improvidence.” So once again, at the bankruptcy court level, the bankruptcy judge says, “There’s no problem with Dad moving his assets into a trust to benefit Junior, even while Junior is inside the Chapter 13.” And the judge says, “That’s the whole purpose for this.”

And the other interesting point brought up is the judge even says, “Hey, this is what spendthrift trusts were created for. Spendthrift trusts were created to do this sort of thing. And in fact, the judge even brings up, oh gosh, 18 something case of [Nicolas Ferguson 00:04:58], and he’s saying, “Hey, this is exactly why spendthrift trusts were created. As far back as 1875, these spendthrift trusts were created to protect kids, to protect people who do wrong stuff.”

And so what happened is, the bankruptcy trustee appealed the decision to the federal district court, and the federal district court, they looked over the whole thing, this is in 2010, and they basically said, “You know what? We see absolutely wrong with the decision of the bankruptcy court. The bankruptcy court was allowed to make that decision.” In fact, because [inaudible 00:05:36] termination, “I conclude there is no error in the bankruptcy court’s determination not to invalidate the subject trust based upon fraud.” So put into plain English, the federal court says, “You know what? Bankruptcy court got it right. Dad was allowed to create a trust for the benefit of Junior, even while Junior was in bankruptcy,” and the bankruptcy trustee couldn’t take over those assets.

Well, the bankruptcy trustee was pretty tenacious in this case. So they lost to the bankruptcy court level, they lost at the district court level, so what’s the natural response for him? Sure enough, they take it to the appellate court. So we go to the court of appeals for the 11th Circuit, and by the way, look at this opinion. It’s double spaced and it’s one page long. “After argument and careful consideration, we conclude the bankruptcy court did not err in denying the creditor’s motion to modify his bankruptcy plan and did not abuse discretion. Accordingly, we affirm.”

So, in a one page was written opinion, appellate court says the bankruptcy court was correct, the district court was correct, we’re not going to overturn those decisions, and the only thing for it to go any further is the US Supreme Court, and very doubtful for the US Supreme Court is going to allow this case to go further. So very interesting case showing that if done correctly, and by the way, the key word here guys, is “done correctly.” You have to do things correctly and do the proper dance steps for something like this to be effective. But if done correctly, parents can create a trust, a spendthrift trust, a protected trust, for the benefit of their kids, even while the kids are in bankruptcy, in particular, a Chapter 13 bankruptcy. So now the kid isn’t doomed to debtors’ prison as that article put it. And now, if the parents put the proper assets in there, future assets are growing for the benefit of the kids, even while they’re in bankruptcy, and they’re protected.

Now, a couple points here. This is just one court case. This is a court case out of the 11th Circuit. It may or may not apply in your particular situation. If you want to find out if this does apply in your situation, or if it could be helpful to you, by all means, give us a call, and we’ll be more than happy to talk things over with you. Once again, thank you very much for your time.

Speaker 1: That’s it for today as we dream of a tax system that works just for you. But until then, you have Tim Berry. See you next Tuesday for another episode of Tax Hacker Tuesday.

Matt: Hey, whenever you’re ready to have Tim customize a Tax Hacker Blueprint for you, a special custom blueprint just for you, go to tackhacker.com, answer a few questions about your situation, tell Tim what you’d like to have happened, and then his team, they’ll take it from there, and then he’ll give you a copy of his free book all around Trump’s new tax plan. Specifically, what the press isn’t telling you. So go to taxhacker.com and we’ll see you right here next week. Taxhacker.com. Take care.