Can I Plan for Bankruptcy?

It is perfectly proper to engage in pre-bankruptcy planning to maximize your allowable exemptions. Your planning, however, should be done with the guidance of a knowledgeable bankruptcy attorney.

Unfortunately, many clients tell me that they sold their car for $1 to their girlfriend, or they signed a quit claim deed to their property to their sister shortly before coming to see me. These types of attempts at protecting assets often result in the needless loss of the very property they were trying to save.

Other times people borrow from their family to catch up payments or to pay off a particular debt. They use their income tax refund to pay their family back followed by filing for bankruptcy. This type of pre-bankruptcy activity often results in a Chapter 7 trustee recovering the money paid on the debt AND recovering the tax refund money paid to the family.

An example of proper pre-bankruptcy exemption planning is as follows: Say you have $6,000 in cash in the bank, a car on which you owe more than its value, and furniture worth $1,000. Depending on your exemptions, a Chapter 7 trustee could take up to $4,950 of your cash (and perhaps the entire $6,000) and use it to pay creditors. What you could do instead is, using the cash that you have in the bank, purchase a used car for $3,225, purchase $1,000 of furniture you need for your house, and use the remaining $700 towards repairs needed for your home. Then, you are left with an exempt car (with no car payments-you can walk away from the one that you are upside down on), exempt furniture, and $1,075 in exempt cash in the bank. The trustee now has nothing to take.

Remember, while it is perfectly acceptable to engage in pre-bankruptcy planning to maximize your assets, it is NOT acceptable to defraud your creditors, or engage in actions that could constitute “bad faith”. You CANNOT “hide” your assets. Please use the advice of an informed bankruptcy attorney.