Do it yourself seems so industrious and self reliant.
And we’ve been bombarded with books, speeches and courses on the evils of probate.
So, I guess it should be no surprise when people try DIY schemes to both avoid probate and avoid lawyers who create probate-avoiding trusts.
Yet they forget an unavoidable truth: the transfer of bank accounts or title to property intended to facilitate the care of the elderly or enable the fee-free passage of property to the next generation can end up involving all parties in a bankruptcy lawsuit.
While the goals are admirable and understandable, the consequences can be horrific when a bankruptcy filing comes along.
Avoid probate and court disaster
Frank Pipitone tells a gut wrenching story of a DIY bankruptcy involving a DIY will substitute that will likely cost the elder her home.
An elderly woman adds her adult children to title of her paid-for home. The children think that their interest in the home is a formality; it remains the mother’s home, they think.
Daughter files bankruptcy, using a petition preparer, not a lawyer. She claims an exemption in the home, ignorant of the fact you only get a homestead in property that you live in.
Bingo, one third of mother’s home belongs to the bankruptcy trustee for the benefit of daughter’s creditors.
What they didn’t know about the law
One of the legal principles at work here is the bankruptcy code’s assumption that the debtor owns those things held in his name. The code goes a step further in the case of real property and gives the trustee the rights of a BFP, a bona fide purchaser for value.
As a BFP, the trustee is entitled to the rights of someone who didn’t know the whole story behind the state of title. The people on title intended that the home remain the property of the mother.
But a BFP is entitled to rely on the record ownership. That gave the trustee the right of a BFP to buy the interest of the daughter, because she appears on the record title.
Saving money on lawyer is costly
There are endless variations of this story, where individuals in good faith and with fine motives, change title to assets to further one goal. They end up creating a different and separate mess in the world of debt/creditor law.
Bankruptcy trustees not only step into the shoes of the debtor as to their property interests. They also have a collection of rights given under state law to the creditors whose interests they serve. Those avoidance powers allow the trustee to sue to recover property the debtor no longer has.
And the lesson is
In the world of probate and alternatives, the lesson is that the law of succession is more complicated than you might think. Adding a name to the title to the elder’s home seemed straight-forward and effective. It wasn’t.
And the problem of the rights of those added to title, and the rights of the creditors of those new “owners” can happen outside of bankruptcy.
The second takeaway involves the view that filing a bankruptcy case is just “filing out forms” for which a lawyer is not required. Saving money by using a petition preparer turned out to be very expensive, when you measure the forced sale of the mother’s home.
Even when you have a lawyer, you need to disclose all the assets that stand in your name, regardless of what you think your quantum of ownership is. Point out all of the transfers or changes of ownership you’ve participated in.
Only with all of your cards face up on the table can your lawyer assess whether DIY property transfers have put you or your intended beneficiaries at risk in a bankruptcy case.
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