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Understanding Bankruptcy: Keep Assets with Pre-Bankruptcy Planning



By:Mike Cibik

Keep your Assets with Pre-Bankruptcy Planning

Planning is an essential part of our lives, whether it’s for something as simple as our workday or more difficult as a retirement account. The idea of planning is not intimidating, yet it can be when it comes to bankruptcy. Why would anyone plan for bankruptcy? Well, you aren’t planning for it like you would a 401k plan, but you can set up a plan to keep as many of your assets as possible. This is called pre-bankruptcy planning. The federal government accepts the fact that a person wants a fresh start with a bankruptcy. However, when it comes to getting help setting up for a bankruptcy, they aren’t too accepting. When the bankruptcy reform of 2005 was created, the wording of it was confusing, as it looks like on paper that Congress doesn’t want you to get the help needed so you can fully understand a bankruptcy and its process. While pre-bankruptcy planning isn’t illegal, it does come with some strings attached to it.


Understanding Pre-Bankruptcy Planning

This is a bankruptcy plan set up to ensure you keep your assets, such as your home and car. No matter if you are filing a Chapter 7 bankruptcy or a Chapter 13 bankruptcy, you can keep the majority of your property. With a Chapter 7, everything you own is exempt and is protected from creditors. The same goes for a Chapter 13 since you have made a payment plan. Yet, there can be an asset that is non-exempt and can’t be protected. This is where pre-bankruptcy planning comes in. So, what is involved?

  1. Converting non-exempt assets into exempt assets. Exempt assets are the items you need to survive – a roof over your head, clothing, a car… etc. You can also reduce the number of non-exempt assets you have, such as selling additional cars or stocks not tied to your retirement plan. If the assets aren’t there, the trustee cannot count it as part of the bankruptcy estate.
  2. Surrendering Life Insurance. I don’t mean giving up your life insurance plan entirely, but you can cash in the part of your insurance plan that accumulates a cash surrender portion. It the beneficiary is not your spouse or child, it is considered an asset. You’ll want to liquidate this portion.
  3. Getting rid of a car. When you own your vehicle or have a great amount of equity in it, it is considered an asset. You can sell the car or trade it in and finance a less-expensive care (and change the exemption status).

You should contact a bankruptcy attorney to learn how to convert a non-exempt asset into an exempt one. The specialized lawyer will also go over Pennsylvania state exemption laws as well to determine how best to use these laws to your advantage. The proceeds from selling assets should go toward living expenses since you will be stopping payments and the debts will be cleared (e.g., Chapter 7) in the bankruptcy.


Pre-Bankruptcy Criteria

As mentioned, this process isn’t illegal, and there aren’t limits as to how much help you can get, but a bankruptcy court will look for certain things to make sure you are trying to cheat the system:

  1. the amount transferred to exempt property;
  2. when you began pre-bankruptcy planning before filing;
  3. what the conversion to exempt property includes;
  4. how the conversion benefit family members; and
  5. ways the debtor mislead creditors during the conversion.

If you are transferring money or property, you must make sure it is done legitimately. The more transfers you do, the more attention you will receive from the bankruptcy court. What can get you into trouble is hiding property (or money), such as transferring it out of your name and putting into someone else’s name, or when you take your name off a paid vehicle. The trustee assigned to your case has the power to get these assets back as well as transferred back into your name. You could risk losing the asset and have your bankruptcy case thrown out.


Practical, Honest Guidance for Pre-Bankruptcy Planning

At Cibik & Cataldo, our attorneys know what is permitted with pre-bankruptcy planning, such as conversions and selling of assets. We want to protect as much of your assets as possible, especially since bankruptcy courts can challenge an attorney’s participation in the planning. We take pride in providing transparency in each bankruptcy case. We offer a free consultation so you can see for yourself how our firm operates and what we can do for you. We are located in Philadelphia and proudly serve the surrounding counties. Call us at (215) 735-1060 to schedule your appointment today. You have nothing to lose, but a great deal more to gain!


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