Wednesday, June 29 2022

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An individual with significant personal collateral debt due to several now failed associated entities came to Worrells to file for bankruptcy. The debt was owed to one of the big four banks and he had already realized something of value. According to the information they provided, there were no material assets available for his realization and, because he was currently unemployed, no income contributions were required under the Bankruptcy Act of 1966.

From the information available at our appointment as bankruptcy trustee, it seemed unlikely that there would be any repayment to creditors. Bankruptcy administration seemed simple enough, until it wasn’t.

Our investigations identified that eight months prior to the bankruptcy designation, the debtor transferred $150,000 from his regulated retirement fund to his self-managed retirement fund. This transaction alone would not be a problem as long as the self-managed fund was regulated, the problem arose when the debtor then transferred these funds from the self-managed fund to a friend for ‘safekeeping’ of him.

Under 116(2)(d)(iii) of the Bankruptcy Act, divisible property among creditors in a bankruptcy does not extend to the balance of a regulated retirement fund. However, bankruptcy trustees have limited power to recover payments made to a retirement fund if it can be shown that those payments were intended to prevent creditors from accessing those funds.

The bankrupt explained to us that at the time of the transfer, the bank was taking possession of her assets subject to the terms of the personal guarantee contract and did not know if her retirement fund was protected in that scenario. So they took matters into their own hands and transferred the retirement balance to their friend’s account for safekeeping.

Herein lies the problem, at the time of the bankruptcy designation, the funds were no longer held in a regulated retirement fund, they were reclassified on transfer to the debtor’s friend to “funds held in trust”, an asset that is acquired and is available to a bankruptcy trustee. After an assertive letter from our attorney, the debtor’s friend paid the $150,000 to the bankruptcy estate, after an understandably thoughtful suggestion that they simply transfer the funds to his friend’s retirement fund to try to reverse the damage caused.

So how could this have been avoided?

With good advice, at a fraction of the cost, this bankruptcy could have prevented you from losing your retirement. Had they come to Worrells when things started to unravel with entities attached to their personal guarantees, we could have explained how bankruptcy works and how divisible assets are treated in a bankruptcy scenario. We do this every day out of courtesy and without expectations. An accountant or attorney could also provide this advice and clarity. It saddens us so much to see the cost of not receiving advice to impact someone so profoundly.

Related Posts:

Income contributions in bankruptcy proceedings

bankruptcy and retirement

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought according to your specific circumstances.

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