Smart, Pre-Bankruptcy Planning

Pre-Bankruptcy Planning

It is best to file bankruptcy after you have had a chance to plan for your filing. Most people have thought long and hard about whether or not to file a bankruptcy case long in advance of the actual filing. It is true that some people bury their heads in the sand and think that their financial problem will handle themselves on their own. But for most people, bankruptcy is not something that creeps up overnight. Bankruptcy is an idea that comes into one’s mind after they realize that they just cannot manage the debt anymore. It is usually not one catastrophic event. It is usually a sequence of events over time that leads one to the conclusion that bankruptcy may be the best option to get out of debt. For this reason, there is plenty of time in anticipation of filing where one can make smart, pre-bankruptcy planning moves.

 Reduce Non-Exempt Assets

One example of smart, pre-bankruptcy planning is to reduce your non-exempt assets or otherwise convert them legally into protectable, exempt assets. One such example would be for naked stocks. I’m referring to stocks that are not part of a protectable retirement account. This would be if you have any number of shares of a Walgreen stock or McDonald’s stock or any other stock sitting in a trading account or brokerage account as un-protected for non-retirement. Depending on the nature of the stock and the amount of that stock, you may be in a position to sell the stock in anticipation of filing. The funds would then have to be utilized for living expenses such as mortgage, rent, utilities, transportation or any other reasonable living expense that you can apply it toward. This way, when you actualy file for bankruptcy, there is no stock interest or asset that the trustee could either administer or count as part of your assets for reorganization purposes. You can check the value of a stock by visiting stock values.

 Life Insurance Proceeds

Another example would be cash surrender value life insurance. This is part of a whole life insurance policy that accumulates a cash surrender portion. Much like the stock in the example above, this cash surrender value may have to be liquidated depending upon who the beneficiary of the life insurance is. If the beneficiary is a spouse or a dependent child, then a debtor can maintain as much cash surrender value as possible. If, on the other hand, the beneficiary is not a spouse, nor a dependent child, then the entire cash surrender value is an asset in a bankruptcy estate. For these reasons, you would want to liquidate your cash surrender value if the beneficiary is not a spouse or dependent child. You must utilize these funds for living expenses just as you did your stock liquidation.

 Vehicles With Equity

Another example where pre-bankruptcy planning comes into play is with vehicles. If you have a paid-up vehicle or a vehicle with significant equity, you can make adjustments to your transportation situation. You could theoretically sell a vehicle, purchase a lesser vehicle, and use those proceeds for living expenses. You can also trade in that vehicle, finance another vehicle with less equity, and basically change the exemption situation to your benefit. I have seen too many cases where debtors have ignored this recommendation. What winds up happening in those cases is the debtor needs to buy out the trustee’s interest in the equity in the vehicle. This happens because the debtor is stubborn and does not want to exchange the vehicle or otherwise get into a different vehicle. People often love their vehicle so much that they’re willing to dig into their pocket and buy out the trustee’s interest in order to keep the vehicle. If they simply made the changes as recommended, they would still have a vehicle, albeit a different vehicle, and they would have spent that money on their needs as opposed to paying it to the trustee for the creditors to receive. You can check the approximate value of your vehicle at NADA.com.

 State Exemption Laws

Each state has different laws with regard to exemptions and bankruptcy if that state is not using the federal system. The state of Illinois has opted out of the federal system. That means that exemptions for residents of Illinois are based on the Illinois statute. Exemptions are limited for the most part with regard to personal property. For example, a person can maintain up to $2400 worth of equity in one motor vehicle. A person can maintain up to $15,000 worth of equity in Homestead, real estate property. A person can also utilize a $4000 wildcard exemption which can be applied to any type of personal property. By knowing these exemptions well in advance, the debtor can utilize the exemptions to his or her advantage legally.

 Things To Never Do

There are certain things that you cannot do in anticipation of filing. One of those things would be to transfer real estate out of your name and into someone else’s name in anticipation of filing. This is not only bad faith, but it is likely to be transferred back by the trustee. Another thing that you should not do is to take your name off of a paid in full vehicle. This again is something that the trustee can long arm back into the bankruptcy estate. You also do not want to file your bankruptcy case if you have given away or sold anything for less than its fair market value in the last year. You also have to be very cautious about transfers to family members or insiders within one year of filing a bankruptcy. For these reasons and more, you need to talk with the bankruptcy attorney long in advance on some of these planning issues. If you don’t, you run the risk that your actions will be deemed fraudulent. If that is the case, you will potentially lose the asset, and possibly not receive a bankruptcy discharge. If you are denied a discharge, then you can never file bankruptcy on those debts again. This is a harsh remedy which is relegated to only the most abusive of bankruptcy debtors. With the proper legal advice, you can ensure that your conduct is going to be not only acceptable under the bankruptcy system but legal enough to withstand any scrutiny from creditors.

As you can see, filing bankruptcy is not something that you should do overnight. This is especially true if you have assets or non-exempt assets which could become property of your bankruptcy estate. By engaging in smart, pre-bankruptcy planning, you can increase your odds of being able to get out of debt without losing your property. Whatever equity you have in property or whatever cash you have on hand, can be better utilized for you and your family in anticipation of bankruptcy filing then to have it turned over to a trustee to pay MasterCard, Visa, American Express and Discover. With great legal advice, you can come through your bankruptcy case with success.

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