Planning For Bankruptcy

Planning ahead before you file for bankruptcy can help you protect more assets and discharge more debt.

by: , Attorney

Planning ahead before filing for bankruptcy can allow you to keep more property, eliminate more debt, and ensure that your case will proceed smoothly. In general, you can engage in a certain amount of prebankruptcy planning by:

  • timing your bankruptcy filing correctly
  • planning your exemptions carefully, and
  • budgeting appropriately.

Time Your Bankruptcy Correctly

Your bankruptcy discharge only eliminates debts that exist at the time your case is filed. Debts incurred after your filing date are not part of your discharge. For example, if you know that you will have to incur more medical debt soon, it may be wise to delay your bankruptcy to include that debt in your filing. But keep in mind that if you charge your credit cards or incur other debts knowing that you will not pay them back, it can lead to allegations of bankruptcy fraud and result in objections to your discharge and criminal investigation.

In addition, if you have recently made payments to creditors or transferred assets out of your name, delaying your bankruptcy can also help you avoid the trustee getting the property back through a bankruptcy clawback.

If you recently moved to a new state, there are certain rules regarding which state exemption system you can use. Timing your bankruptcy correctly can allow you to use the exemptions of the state that permits you to keep more of your property.

Review and Plan Your Exemptions Carefully

Each state has a unique set of bankruptcy exemptions. Prior to filing your case, review the exemption laws of your state carefully (or talk to a knowledgeable bankruptcy attorney) to make sure you can keep all of your property in Chapter 7 bankruptcy.

You are allowed to protect more of your property by engaging in a reasonable amount of exemption planning as long as it is done in good faith. If you have nonexempt property, you may be able to use up or convert your nonexempt assets into exempt ones before filing your case.

If your nonexempt property is a liquid asset such as cash or money in the bank, the best way to protect it is to spend it on necessary living expenses such as rent, food, or gas to get your balance as low as possible on the date of your filing. If you have other nonexempt assets, you may be able to sell them to purchase an exempt asset.

However, be aware that there is a fine line between permissible exemption planning and bankruptcy fraud. Excessive exemption planning or systematic conversion of assets typically has a higher likelihood of being considered fraud.

Budget Appropriately

If you are about to file for bankruptcy, you can generally stop paying creditors whose debts will be discharged in your case. The most common examples include credit card debt and medical bills. In general, making payments on these debts shortly before filing for bankruptcy is a waste of your money. That money can be better spent on more important payments such as your mortgage or car payment. (To learn more, see Should I Stop Paying Creditors If I'm Going to File for Bankruptcy?)

Also, if you are planning to file for Chapter 13 bankruptcy, make sure to create a realistic budget to have the best chance of successfully completing your case. Your monthly Chapter 13 plan payment amount depends on your income, expenses, and types of debt you have. Knowing what your plan payments will approximately be ahead of time can help you budget accordingly.

For more information, see How Chapter 13 Plan Payments Are Calculated.

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