Planning For Bankruptcy

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

As with any financial move, considering important factors before filing for bankruptcy will help you keep more property, eliminate more debt, and ensure that your case will proceed through the process smoothly. While "planning" can be taken too far (more below), a certain amount of prebankruptcy planning in the following areas is appropriate:

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

Timing a Bankruptcy

The purpose of considering timing issues is not to avoid paying a creditor; however, you don’t want to put yourself at a disadvantage, either. Here are a few timing issues to consider:

Future bills. Your bankruptcy discharge—the order that wipes out qualifying debt—eliminates debts that exist when you file your case. Debts incurred after the filing date aren’t part of your discharge. For instance, you can wipe out utility charges before you file, but you’ll be responsible for paying the electric, gas, garbage, and phone bills for services received afterward even though the bankruptcy case is active. This timing issue often arises with filers facing a medical issue. For instance, it’s often best to wait to file until you’re reasonably sure that you won’t incur any further medical bills. Otherwise, you will have to wait several years before qualifying for another debt discharge because of the limits that exist on multiple bankruptcy discharges.

Moving to another state. Where you file your bankruptcy—and when—matters when it comes to protecting property using bankruptcy exemptions. If you file for bankruptcy after moving to a new state, you’ll have to follow the rules governing the state exemption system. Timing your move and bankruptcy case will be essential if you want to use the exemptions of a state that will permit you to keep more of your property.

Recent transfers. It’s not a good idea to make large payments to preferred creditors, sell property, or transfer it out of your name shortly before bankruptcy. If you stray outside of the rules, the bankruptcy trustee assigned to oversee your case can get the property or payment back using a clawback provision. That’s not to say that you can’t do these things, but you’ll want to be aware of the limitations to which you’ll be subjected. For instance, business owners have a larger monetary threshold for creditor payments than individuals do. And, while you can always sell your property at fair market value if you need the funds for necessary expenses, such as rent, food, and utilities, you’ll want to keep good purchase records.

Fraud allegations. While it might seem tempting, you won’t want to run up your credit cards or incur other debts shortly before bankruptcy. Anytime you purchase items on credit knowing that you won’t pay the creditor back, it can lead to allegations of fraud—both in and outside bankruptcy. This type of action could result in an objection to your discharge or a criminal investigation. In bankruptcy, additional protection exists for creditors. If you buy a luxury item on credit 90 days before filing, or take out a cash advance 70 days beforehand, the purchase is presumptively (automatically) considered fraudulent, and you’d have to prove that it the purchase was necessary in bankruptcy litigation. Learn about the current dollar amounts for presumptive fraud in bankruptcy.

Reviewing and Planning Bankruptcy Exemptions

Bankruptcy exemptions are the laws that tell you the type and amount of property you can protect in bankruptcy. Each state has a unique set of bankruptcy exemptions. Before filing your case, you’ll want to review the exemption laws carefully (or talk to a knowledgeable bankruptcy attorney) to make sure you can keep the property that’s important to you. What will happen to nonexempt property will depend on the bankruptcy chapter you file.

  • Chapter 7. The trustee will sell nonexempt property for the benefit of your creditors. The trustee might allow you to exchange nonexempt bankruptcy property for exempt property, or give you a short amount of time to pay for nonexempt assets using post-filing earnings or a loan from friends or family (neither of which would be part of the bankruptcy estate).
  • Chapter 13. You’ll keep your nonexempt property, but you’ll pay the value of the nonexempt portion, minus costs of sale and trustee fees, through your repayment plan. Your monthly plan amount might be higher if you have a large amount of disposable income or a large amount of nondischargeable debt that must be repaid in full through your plan, such as recent tax arrearages or support arrearages. For more information, see How Chapter 13 Plan Payments Are Calculated.

You might be able to convert nonexempt assets to exempt assets; however, be aware that there is a fine line between permissible exemption planning and bankruptcy fraud. Excessive exemption planning or systematic asset conversion have a higher likelihood of being considered fraud. Consult with a local, knowledgeable bankruptcy lawyer to find out what your court allows.

Budgeting for Bankruptcy

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. Making payments on these debts shortly before filing for bankruptcy is a waste of your money. That money can be spent on more important payments such as your mortgage or car payment. However, you’ll want to be sure that you will qualify for bankruptcy and can afford the fees before you stop making your payments. Otherwise, you might have trouble catching up later.

You can learn more in Should I Stop Paying Creditors If I'm Going to File for Bankruptcy?

Getting Legal Advice to Avoid Problems

Remember that it’s never appropriate to take steps to avoid paying funds that a creditor would otherwise be entitled to receive. If you’re concerned that you might be crossing into that territory, be sure to consult with a local bankruptcy attorney. A bankruptcy lawyer can either explain how to achieve your goal without violating a bankruptcy rule or law or advise you against particular actions.

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