What are Bankruptcy Loopholes?
If you are considering personal bankruptcy, you might have come across talk of bankruptcy loopholes and you may be wondering what those could be. According to the Oxford English Dictionary, a loophole is “an ambiguity or inadequacy in the law or a set of rules.” More colloquially speaking, a loophole is a term that is sometimes used in the law to refer to a way of avoiding or evading a particular law or the specific language in a statute. Bankruptcy loopholes, as such, are ways that some people have been able to prove eligibility for Chapter 7 bankruptcy even though they should not actually have been able to pass the means test, for example. There are other kinds of bankruptcy loopholes for both consumers and business owners, but we want to focus on the ways in which bankruptcy loopholes unfairly benefit some consumers while leaving others without the ability to file for Chapter 7 bankruptcy.
As you may know, Senator Elizabeth Warren’s recently proposed bankruptcy reform legislation aims to eradicate some of the loopholes that currently exist, and we want to tell you more about how those currently function in practice.
Distinguishing Between Consumer Debts and Business Debts
If you are considering Chapter 7 bankruptcy as a consumer, you likely know that you will need to be able to pass the means test to show that your income is low enough that you qualify for liquidation bankruptcy. However, there is a loophole that some higher earners use to qualify for Chapter 7 bankruptcy even though they earn substantial wages.
One common way in which higher earners may be able to qualify for Chapter 7 bankruptcy as consumer debtors, despite being unable to pass the means test, is to argue that more than half of their debts are actually business debts. Many individuals are also small business owners, and many consider themselves to be entrepreneurs or sole proprietors—even without having business registrations or filings, or relying on that business as a primary source of income. If a high earner is able to show that more than 50% of his or her debts are “business” debts, then under U.S. bankruptcy law there is no requirement to pass the means test.
Putting Money Into Certain Types of Trusts
Another common bankruptcy loophole involves the use of trusts. Back in 2005 when the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) was passed, The New York Times ran an article about how trusts could create loopholes for wealthy bankruptcy filers. That loophole persists today. In short, by relying on asset protection trusts, it may be possible for a wealthier person to put funds into a trust through which she or he can protect those funds from creditors while also qualifying for Chapter 7 bankruptcy. This is sometimes known as the “millionaire’s loophole.”
In addition, assets held in a trust with a spendthrift clause may not be considered property of the bankruptcy estate. As such, any assets that are held in a spendthrift trust might not impact a person’s eligibility for Chapter 7 bankruptcy even if those assets are substantial. This is often known as the “spendthrift clause loophole.”
Contact a Bankruptcy Lawyer in Oak Park
Do you have questions about Chapter 7 eligibility? An Oak Park bankruptcy attorney can help. Contact the Emerson Law Firm today for more information.
See Related Blog Posts:
Is There More Than One Type of Consumer Bankruptcy?
New Study Addresses Racial Disparities and Consumer Bankruptcy
As you may know, Senator Elizabeth Warren’s recently proposed bankruptcy reform legislation aims to eradicate some of the loopholes that currently exist, and we want to tell you more about how those currently function in practice.
Distinguishing Between Consumer Debts and Business Debts
If you are considering Chapter 7 bankruptcy as a consumer, you likely know that you will need to be able to pass the means test to show that your income is low enough that you qualify for liquidation bankruptcy. However, there is a loophole that some higher earners use to qualify for Chapter 7 bankruptcy even though they earn substantial wages.
One common way in which higher earners may be able to qualify for Chapter 7 bankruptcy as consumer debtors, despite being unable to pass the means test, is to argue that more than half of their debts are actually business debts. Many individuals are also small business owners, and many consider themselves to be entrepreneurs or sole proprietors—even without having business registrations or filings, or relying on that business as a primary source of income. If a high earner is able to show that more than 50% of his or her debts are “business” debts, then under U.S. bankruptcy law there is no requirement to pass the means test.
Putting Money Into Certain Types of Trusts
Another common bankruptcy loophole involves the use of trusts. Back in 2005 when the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) was passed, The New York Times ran an article about how trusts could create loopholes for wealthy bankruptcy filers. That loophole persists today. In short, by relying on asset protection trusts, it may be possible for a wealthier person to put funds into a trust through which she or he can protect those funds from creditors while also qualifying for Chapter 7 bankruptcy. This is sometimes known as the “millionaire’s loophole.”
In addition, assets held in a trust with a spendthrift clause may not be considered property of the bankruptcy estate. As such, any assets that are held in a spendthrift trust might not impact a person’s eligibility for Chapter 7 bankruptcy even if those assets are substantial. This is often known as the “spendthrift clause loophole.”
Contact a Bankruptcy Lawyer in Oak Park
Do you have questions about Chapter 7 eligibility? An Oak Park bankruptcy attorney can help. Contact the Emerson Law Firm today for more information.
See Related Blog Posts:
Is There More Than One Type of Consumer Bankruptcy?
New Study Addresses Racial Disparities and Consumer Bankruptcy
Comments
Post a Comment