By filing your bankruptcy after applying appropriate asset management strategies, you can save your assets and pay the right creditors.
What’s Pre-Bankruptcy Planning?
Most people who file bankruptcy do not lose anything they own. They file a Chapter 7 “straight bankruptcy” case and everything they own is “exempt,” protected from their creditors and beyond the reach of the bankruptcy trustee. Or if something they own is not “exempt,” they instead file under Chapter 13, the “adjustment of debts” option, which has a special way of protecting “non-exempt” assets.
But you may have assets that are not exempt but can’t be protected well through Chapter 13. If so, you may well benefit from pre-bankruptcy planning. This consists of strategies for managing and positioning your assets before filing bankruptcy to protect those assets once you do file. Those strategies can also better enable you to pay certain creditors that you want or need to be paid over those that you don’t.
Three Kinds of Pre-Bankruptcy Planning
There are three ways to meet these goals before filing your bankruptcy case:
1. Convert assets that are not exempt into assets that are exempt.
2. Deplete—spend or use—assets that are not exempt so you no longer have them at the time your case is filed.
3. Accumulate assets that are exempt.
The next few blog posts will show how these strategies work. But first let’s look at a very important concern.
The Potential Dangers of Pre-Bankruptcy Planning
A key principle of bankruptcy law is that honest debtors should be able to discharge—legally write off—their debts (except for certain kinds of debts), but dishonest ones should not be able to. That vague principle is incorporated into the Bankruptcy Code in various ways. One important pronouncement of this as applied to pre-bankruptcy planning is in Section 727(a)(2):
(a) The court shall grant the debtor a discharge, unless—
(2) the debtor, with intent to hinder, delay, or defraud a creditor or [the bankruptcy trustee], has transferred, removed, destroyed, mutilated, or concealed, or has permitted to be transferred, removed, destroyed, mutilated, or concealed—
(A) property of the debtor… .
This seems to say that transferring a non-exempt (unprotected) asset with the intention of making that asset not be available to pay creditors is inappropriate. But not necessarily so. Some federal courts have ruled that protecting assets in such ways is acceptable. For example, one federal circuit court did not find objectionable a debtor’s transfer of money from a non-exempt (unprotected) IRA account into an exempt (protected) pension plan immediately after the debtor had a $4.5 million arbitration award entered against him in a business dispute. The circuit court said that “the fact that nonexempt assets were deliberately converted to exempt assets just prior to filing the bankruptcy petition” is “insufficient as a matter of law to establish fraud.”
So there is a tension in the law in how much you are allowed to sell or otherwise transfer your assets in order to position yourself to your advantage before filing bankruptcy. Clearly this is an area where you need the expertise of a highly competent bankruptcy attorney to advise you about BOTH the safest way to engage in asset-protecting transfers and other strategies AND which strategies are likely to be safe and which are risky. So you need a seasoned attorney in your corner in this arena more than usual.
But here are a few tactical ideas that you may want to talk about with your attorney as you and he or she formulate your strategies:
1. Each transfer or maneuver you engage in must have a legitimate purpose beyond simply avoiding paying your creditors.
2. The more transfers and other maneuvering that you do, and the more money involved, the greater the risk.
3. The greater the risk, the more it makes sense to not protect ALL of your assets but rather leave something for the bankruptcy trustee to give to your creditors.