The accident was probably the client’s fault, remembers Austin Frye, CEO of the Frye Financial Center in Miami. “He said that he was driving two Uber passengers and made a lazy left turn at an intersection,” Frye says. “A motorcyclist clipped him as he went through the intersection, spun out, crashed and died.”

The client ”was shaken up by what had happened,” Frye continues. “He was also scared by what could happen to his assets, especially after his insurance company declined to cover him because he was using a private vehicle for commercial purposes.”

Was bankruptcy the next step?

Frye looked at the client’s assets: an IRA, a small 401(k) and his home.

“In Florida, all those assets are exempt from creditors,” Frye says. “I advised him that there was no reason for him to go bankrupt, because he had no assets that would be subject to bankruptcy.”


In helping his client explore the possibility, Frye took all the right steps. He didn’t pretend to be a bankruptcy attorney. Instead, he calmed his client, considered asset types and titles both before and after the accident, and was ready to refer the man to an attorney if that seemed necessary.

Planners must remember that they aren’t bankruptcy lawyers, says John Friedman, founder of John Friedman Financial in San Francisco and a former attorney who worked in bankruptcy law for about two years. But, he adds, “a planner should have a good nose for knowing when to call a bankruptcy attorney. A planner who has known a client for a long time and served a vital role should be intimately involved with the decision-making process. If you can help someone in their darkest hour, that’s profound service.”

When she suggests seeing a bankruptcy attorney, Denver-based planner Kristin Sullivan outlines the reasons she thinks that conversation could be helpful. “It’s like giving estate-planning advice,” she says. “You need to keep it very general, so that a person can go interact with an attorney in a smarter, more efficient way.”

She adds that she never tells clients bankruptcy is or isn’t for them. “When you’re in the business of charging for advice, you better be sure that you’re giving advice that you’re qualified to give,” Sullivan says.


Instead of making recommendations on a bankruptcy filing, planners should focus on protecting client assets.

“Anyone who visits a financial planner has some assets, and protecting those assets should be part of every conversation,” Frye says. The time to consider protection is before there is a claim, because any measures taken after that could constitute fraudulent conveyance.

Every U.S. state legally protects some assets from creditors. The list varies by state, and it’s important to know what rules apply in the state where your clients live.

In order for that protection to stick, however, some conditions may apply. Frye has another client who still owes money to a bank that foreclosed on his rental properties, because the properties sold for less than the client’s mortgage balances.

“They worked out a payment plan where he pays a small amount each month,” Frye says. “He’ll have to live to be 120 to pay it off, and his estate is liable for it, so when he dies, there will be a claim against his estate.”

The good news for the client’s family, however, is that he has few assets beyond his home and retirement accounts. “His retirement accounts are exempt, as long as he names a beneficiary,” Frye says. “Not doing so could make it subject to claims, as well as to probate. He needs to name a person or a qualified trust. Otherwise, he creates a huge problem for his kids.”

Titles are another important consideration. Frye’s Uber-driving client is the sole owner of the car involved in the accident. If he and his wife had owned the car together, Frye says, “he would have been sued as the driver, and they both would have been sued as the owners of the car.” Titling the car in his name protected his wife’s assets.

In other instances, titling assets in common can protect them from creditors. A Frye client who was considering divorce is an obstetrician who faced the possibility of malpractice judgments. In Florida, assets that two spouses own in common can’t be divided to satisfy judgments against just one partner. Divorcing his wife would have put half the assets solely in his name, making them vulnerable to creditors. “He reconciled with his wife as a result,” Frye says.

Rather than wondering whether joint or sole ownership will help or hinder, some clients form limited liability corporations, which can legally own assets. “LLCs are generally protected from creditors,” Frye says.


Andy Tilp, president of Trillium Valley Financial Planning in Sherwood, Ore., has seen clients consider bankruptcy because of consumer debt. “We walk through their budget and talk about needs versus wants.

People get in the habit of having a certain lifestyle. I tell them that solving the problem will require sacrifice and change,” he says.

Some clients, Tilp says, will never fully recover, particularly clients older than their 50s. Clients in their 30s, on the other hand, may have enough time to rebuild their financial lives — but only if they keep a lid on future spending.

“Celebrities, athletes, contractors, and anyone who lives on commission can get themselves in trouble, because they anchor to their top year,” says Rick Kahler, president and owner of Kahler Financial Group in Rapid City, S.D. “They say, ‘I made $8 million last year’ and set their lifestyles accordingly, and then in the bottom year they make $4 million and don’t cut their lifestyle.”


If a client is broke, how does a planner get compensated? “If you have assets under management in retirement accounts, you’ll continue to get your management fee,” Sullivan says, because those assets are protected typically.

Planners who charge hourly for advice should do so. “Let them pay you,” Friedman says, particularly if payment occurs before the preference period. A bankruptcy court can order payments made during the 90-day preference period returned for more general distribution to a client’s creditors. Debts incurred after a bankruptcy filing are not part of the bankruptcy, so there is no risk that payment for advice a planner gives after the filing will be recalled.

If a client owes you a significant amount, Friedman suggests getting an attorney of your own. “If you have a pre-petition debt from the person going into bankruptcy and you want to get paid, you’re going to get lumped in with everyone else. If the sum you’re owed is a big enough number, get a lawyer who knows something about bankruptcy. People get paid out of bankruptcies all the time” — and there’s no reason planners can’t be among them, he says.   

Ingrid Case, a Financial Planning contributing writer in Minneapolis, is a former editor at Bloomberg News.

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