Bankruptcy of a Child–What’s a Parent To Do?

Written by Myrtle Beach Bankruptcy Lawyer, Allen Jeffcoat

When you file bankruptcy, everything you have comes into your bankruptcy estate, including property inherited from a parent.  However, by proper estate planning, parents can protect a child who might be experiencing financial problems–even if the child files bankruptcy.

Sally has had a long, happy life, and has been blessed with a wonderful family and a successful business that she and her late husband Jim started “up North” many years ago, then sold for enough money to comfortably retire to Myrtle Beach. Between selling her business and the assets she inherited from Jim, Sally has more than enough savings to last her lifetime and leave a significant inheritance to each of her three children, along with a significant gift to charity. Sally’s home is paid for, as is her vacation home in Maine, and she has no debt. Sally spends most of her free time visiting her seven wonderful grandchildren.

So why is Sally so anxious today? She visited her doctor last week, who confirmed that she’s been having a series of mini-strokes recently, and she’ll also need some hip replacement surgery soon. But that’s not what’s bothering her now. Now she’s in her lawyer’s office, working out changes to her Will that she’s been putting off for too long. Her visit with her doctor has added urgency to her meeting today.

“I’m worried about Junior” she tells her lawyer. “He’s been caught in the real estate collapse in South Florida, and he told me a few weeks ago that he might not make it without filing bankruptcy. I’m so worried about him and his young family that I can’t get a good night’s sleep.” She continues, “Even if he doesn’t file bankruptcy, he thinks that he may be facing some very large judgments against him that will take many years to go away.”

Sally pauses, then tells her lawyer, “I want to treat all three of my children the same with their inheritance if something happens to me. Heaven knows that Junior will need his share as much as the other two, if not more. I think his financial stress is hurting his health, and he has those four children to feed, raise and educate.” Then, with a flash of anger and frustration, she adds, “But I’ll be damned if I want anything that Junior inherits from me to go to his creditors. They’re ruining his life already! But what do I do about protecting Junior’s inheritance if I don’t make it through surgery and Junior’s finances collapse?”

Sally’s lawyer understands the problem. The Bankruptcy Code sweeps up all property of a debtor into a pot for creditors, even property received through inheritance at any time before and up to 180 days after a bankruptcy filing. There’s little if anything that Junior can do about the problem. Even if Junior doesn’t file bankruptcy, his judgment creditors may have many years to wait until Junior’s finances improve–whether through inheritance or otherwise–then pounce on him and seize his assets.

But there’s plenty that Sally can do to keep this from happening–as long as she sets up her will or  trust so that Junior’s part of the inheritance goes not to Junior directly but into a discretionary trust for Junior and his family–a trust not administered by Junior but otherwise flexible. Sally can also use the same approach to take care of her disabled grandchild, without losing a lifetime of future government benefits. Sally’s lawyer outlines her options to her, and Sally smiles for the first time all day. She can’t wait to get home and call Junior.

Otis Allen Jeffcoat, III is a bankruptcy lawyer practicing in Myrtle Beach, North Myrtle Beach/Little River, and Pawleys Island/Litchfield. He has been practicing law in South Carolina since 1973 and along the Grand Strand since 1977. Most of Allen’s bankruptcy and workout work is for individual and small business debtors, although occasionally he helps small landowners deal with defaults by their bankrupt commercial tenants. “I get to meet and help clients at a time of high stress and some despair for many of them, when they are under a level of financial pressure that they haven’t felt in their lifetimes,” says Allen. “When they tell me that they feel better about their future, that they have some hope, that they understand how they can move forward in a responsible way--that’s the best ‘thank you’ that a lawyer can have, and it makes my day.” “I wish sometimes that my clients and I had talked sooner, when they had more options,” Allen continues, “But in almost all cases I feel that I have helped them through some difficult restructuring in their finances, with positive results for their emotional and physical health.” In addition to his bankruptcy practice, Allen handles a variety of matters for clients, including residential real estate, commercial real estate, environmental law, corporate work, foreclosures, receiverships and loan workouts of all sizes. He is experienced in resort development, from timesharing to large planned unit developments and condominiums, and the homeowner association litigation that such developments spawn from time to time. He also helps clients with their needs in estate planning, probate administration, litigation, and elder law. Allen grew up in Columbia and attended public schools there before heading north to Princeton University for college. He graduated from Princeton magna cum laude with a degree in Politics. He returned to Columbia for law school at the University of South Carolina, where he served on the Law Review. He was in private practice in Columbia for a few years, then got married and moved to Myrtle Beach in 1977, where he has remained ever since. Giving back to his community and state is important to Allen. He is a founder of the Grand Strand Family YMCA, was its first President, and now serves as a Director of the YMCA of Coastal Carolina. He is a Director of the Waccamaw Community Foundation, and is a past Trustee of United Way of Horry County, Inc. He has served as a Trustee of The South Carolina Nature Conservancy and as its Chairman. He is a member of the City of Myrtle Beach Election Commission; a graduate of Leadership Grand Strand, and past President of the Rotary Club of North Myrtle Beach. He is active in the Princeton University Schools Committee and in fund-raising for Princeton University. Allen is married and has the smartest, most beautiful granddaughter in the country. He also has two daughters and one son-in-law. He lives with his firm administrator, who also happens to be his wife, Mary.

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