When times get difficult, the first people we turn to is our family. It is no different when we go through financial difficulties. You may have loaned money from a family member or taken a loan yourself. You may have given that 1992 Geo Metro to your 18 year-old as they headed off to college, co-signed on a loan, or maintained a bank account for your minor children. All of these things are done with an eye towards caring for our loved ones and helping them as much as we can.
Then, when you get to the point where your financial problems are beyond what your family can help with, you turn to bankruptcy. As you go through the bankruptcy process you will find that your financial world is an open book. You will be required to disclose not only debts, and assets, but certain financial transactions. Sometimes your dealings with your family can get caught up in the wide bankruptcy- net that is cast over your financial dealings. The following are three ways in which your children may be impacted by your bankruptcy:
#1 – Minor Bank Accounts
This is probably the most common one I see. When our kids are young we open up a bank account in their name and then the money they earn or the birthday checks from grandma get deposited there for down the road. All banks are going to require an adult on the account with the minor child. Then, when you file for bankruptcy, you have the issue that you are required to disclose all bank accounts that you are on. You are on that account, but the money is not yours.
Here in Arizona this has not been too big of an issue if we can show that it is not an account where you deposit your money and so long as we disclose it in the Statement of Financial Affairs (“SOFA”) as property that you control but do not own. If you don’ live in Arizona you should check with a bankruptcy lawyer in your state that understands your bankruptcy exemption laws and what the regular practice is.
#2 – Transfer of Assets
Another common issue that can arise in bankruptcy is when parents transfer a car title into the name of one of their children. This scenario is almost always a teenager who is driving one of the family cars and sometimes even paying for the car and is now ready to head off for college. Before he leaves, mom and dad transfer the title of the car to the child. It is all done innocently, however, if these transfer occurred at anytime within the two years before your filed your bankruptcy it could cause some problems.
Here’s why. In bankruptcy any transfer of assets in the prior two years must be disclosed. The reasoning behind this rule makes sense. You shouldn’t be able to give away all of your stuff right prior to filing bankruptcy, get your discharge, and then be home free. If you have assets that are not protected. then in a chapter 7 bankruptcy you will lose those assets with the proceeds going to your creditors.
However, while the Bankruptcy Code’s intentions are correct, your transfer of the family car to your son or daughter can also get caught up in this snare and cause an issue in your bankruptcy. In fact, the bankruptcy trustee can go and get the car that was transferred and bring it back into your bankruptcy and sell it for the benefit of your creditors. This results in your kid having no car and you being really embarrassed.
In Arizona most often there is a work-around. The bankruptcy trustee may permit you to pay the value of the car that you transferred to your creditors and thus allow your son or daughter to keep the vehicle.
#3 – Co-Signing
Many parents co-sign for credit for their kids. Often I see this in the area of student loans. The parents sign on as a guarantor and when they file for bankruptcy the student loan lender is notified. Your bankruptcy should not impact your son or daughters ability to get student loans (except you likely won’t be a good option for co-signing), however I have had clients run into issues with student loan lenders who have put a freeze on an account after being notified of the bankruptcy filing. We were able to get everything straightened out with a letter explaining that the student was not in bankruptcy just the co-signer.
It is also important to note that if you are filing a chapter 7 bankruptcy and you are a co-signer on a child’s credit card or other debt, that the creditor will still be able to continue and try and collect payment on the debt – even though you are in bankruptcy and will no longer be held liable.
So, in summing all this up, if you have financial dealings with your kids – and most parents do – let your bankruptcy lawyer know ahead of time. Many times the issue can be dealt with and at a minimum they can prepare you for any issues that may be in your future.