Plan Well Before Filing Bankruptcy, But Not Too Well

Fotolia_57337978_XS-multi arrowsEvery bankruptcy needs to be planned.

That planning may be nothing more than determining that there are no obvious barriers to discharge.

Other situations require more analysis.

You want to walk out of bankruptcy with as much of your assets as possible.  You want to leave nothing for a bankruptcy trustee to sue anyone about.

Yet it’s not always easy.

The line between maximizing the exemptions you can claim in bankruptcy and actions that hinder, delay or defraud creditors is fuzzy.

Hinder, delay and defraud and your bankruptcy discharge can be denied.  So the distinction is important.

Arranging your affairs before bankruptcy

There is a general principle that debtors are entitled to exempt property for a fresh start, whether or not it frustrates creditors.

The distinction between acceptable exemption planning and dangerous manipulation of assets is uncertain.  It seems to vary from region to region and from courtroom to courtroom.

Knowledge of those variations and local tolerances for pre bankruptcy planning is one of those essential elements that a good bankruptcy lawyer brings to the table in your case.

Experienced bankruptcy attorneys will have a sense of what is acceptable where you expect to file.

Exemptions in general seem to be an area which bankruptcy debtors without lawyers do badly.  

Generally, making contributions to IRA’s on the eve of bankruptcy seems to be widely permitted.

♦  Other ideas on spending down non-exempt cash.

Judge’s eye view

Judge Newsome, a now retired bankruptcy judge sitting in Oakland, California, listed issues that “pressed the envelope” in his view of permissible exemption planning.

  • Loans taken out to acquire exempt property
  • Transfers after entry of large judgment or other event creating liability
  • Transfers made on the eve of bankruptcy
  • Sharp dealing with creditors
  • Transfers to insiders
  • Less than adequate consideration for transferred property
  • Debtors remain in possession of transferred property

Actions of this sort may provoke a challenge to the exemption in question, at best, and a challenge to the debtor’s right to a discharge at worst.

More on dangers of transferring assets

Note that many of Judge Newsome’s troubling transactions involve the debtor transferring an asset to others.  That’s why my list of do’s and don’ts for clients says clearly and repeatedly:  don’t transfer anything without checking with your bankruptcy lawyer first.

Read more

Exemption basics

Find a good bankruptcy lawyer

What do I have to do to file bankruptcy

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About the Author
Northern California bankruptcy lawyer Cathy is a 30+ year veteran of bankruptcy practice in the Silicon Valley. She is known for energetic representation of clients and her command of bankruptcy law.