BANKRUPTCY AND OTHER FAMILY FINANCIAL ISSUES
By Shawn M. Dunlevy

Bankruptcy and other financial issues can have devastating effects on the family unit. Often these issues are unexpected and cause stress to the family, which may be avoided with advance knowledge or planning. Every family should be aware of the most frequently encountered bankruptcy and other family financial problems and alternatives to protect the family from their damaging effects.

Loans to Family Members

Parents are often asked to make loans to children, and often make the loan without hesitation or reservation whatsoever. However, the loan is often made in a vacuum, because the parent has no information about the child's overall financial condition.

Loans to family members may result in a special problem to the parent if the child files for bankruptcy. A parent is considered an insider and, under applicable bankruptcy law, payments on the loan in the last year before the child's bankruptcy are subject to being returned to the bankruptcy trustee to be shared pro-rata by all the child's creditors. These payments by the child to the parent are considered preferences, and the requirement of repayment to the bankruptcy trustee can cause utter shock and dismay to the parent and disruption of the family relationship. One way to prevent this problem is to require collateral for the loan, which is an exception to the parent being treated as having been preferred to the child's other creditors.

Transfers of Property to Children

Parents often transfer real estate or other property to children as a form of estate planning. Sometimes the parents reserve a life estate in the property, and sometimes the property is transferred to one or more of the children as equal owners. Often the children are unaware of the transfer, because the transfer does not require the child's signature or knowledge.

A problem frequently occurs when one of the children files for bankruptcy. Suddenly the child's interest in the property belongs to the bankruptcy estate, to be sold by the bankruptcy trustee with distribution of money to the child's creditors. As a practical matter, the parents or other siblings must often generate the money to purchase the property from the bankruptcy trustee, causing unexpected grief and expense to the other family members. This problem may often be avoided by more formal and thoughtful estate planning which may maximize tax advantages while protecting family assets from creditors' claims.

Bankruptcy and Marital Dissolution

Today fifty percent of all marriages end in dissolution, resulting in a host of family issues. These include payment of maintenance (formerly referred to as alimony), child support, and distribution of property or property settlement. A marriage dissolution is frequently a financial disaster, which often results in one or both spouses filing for bankruptcy.

Bankruptcy law in general seeks to protect a spouse's right to receive maintenance payments and child support payments. In other words, if you owe maintenance or child support, bankruptcy offers virtually no relief. On the other hand, if you are entitled to receive maintenance or child support, bankruptcy is your ally.

While bankruptcy generally protects maintenance and child support, property settlements have been treated differently. In the past, a spouse owing a property settlement was sometimes entitled to discharge the obligation in bankruptcy. Congress recently amended the Bankruptcy Code to provide for increased protection for property settlement agreements, and the spouse owing the property settlement under a divorce decree will have difficulty discharging the obligation.

Employee Retirement and Benefit Accounts

Many members of a family may have sizeable employee retirement and benefit accounts. It is often tempting to access these accounts to make loans to family members, invest in speculative deals, or for other purposes. Funds from such accounts may sometimes be borrowed or withdrawn without the knowledge of one of the spouses or the rest of the family.

Experience and common sense suggest that these accounts should not be touched for a variety of reasons. First, withdrawing from the account before retirement will cause adverse tax consequences, including liability for payment of higher taxes. Second, investments in speculative deals often fail, resulting in permanent loss of money earmarked for retirement. Third, employee retirement and benefit accounts are often allowed as exempt in the event of bankruptcy or other financial crisis, while they continue to earn interest. Consequently, while other assets may be taken by creditors, the debtor may be able to retain retirement plan account balances for future support of the family.

Every family will be affected by various financial risks, exposure and potential rewards. Even the best of intentions may be sidetracked by bankruptcy or other family financial crises. A little knowledge, fact gathering and planning may alleviate the unexpected adverse consequences this somewhat technical area of law imposes on the unwary.

WHEN UNMARRIED COUPLES BREAK UP
By David R. Oberstar

With increasing frequency, family law attorneys must deal with unmarried couples who are splitting up. These situations present unique legal problems. One aspect of the relationship is specifically governed by Minnesota law. If the parties are parents of a minor child, issues of custody, visitation and child support must be resolved. The parties may reach an amicable agreement on the issues, but a court order must be entered determining the custodial parent (the party with whom the minor child will live), setting forth a visitation schedule, and determining the amount of child support to be paid by the non-custodial parent. A court order may help avoid future disputes between the parties concerning the minor child. The child support provisions of the order also will permit the custodial parent to take advantage of Minnesota laws designed to help the custodial parent collect child support. For example, the court may require that child support be withheld from the non-custodial parent's paycheck.

Another problem often faced by unmarried couples is the joint ownership of real property. For married couples, Minnesota laws governing dissolution of marriage provide a process for dividing those assets. These laws do not apply, however, to unmarried parties. Division of real estate owned by unmarried parties who cannot agree may be resolved through a partition action in state district court if the parties are both listed on the title as owners of the property. If only one party holds title to the real estate, but both contributed to payment of the mortgage, having the court divide this asset between the parties may be both expensive and time consuming.

Some simple planning by the unmarried couple can avoid major problems. For example, it is recommended that unmarried couples keep their finances separate. Each should pay a fair portion of the bills. Credit cards should be in the name of only one person. Checking and savings accounts should not be joint accounts. Real estate should be purchased in only one party's name, with that party being solely responsible for payment of the mortgage. Similarly, items of personal property, such as furniture or appliances, should be separately purchased by one of the parties, who should retain proof of the purchase.

Following these suggestions may help avoid complicated and costly legal disputes if the couple separates.