What Not to Do Before Filing for Chapter 7: Pre-Bankruptcy Planning
When people are overwhelmed with staggering credit card bills, foreclosure notices and other financial obligations, they often look to bankruptcy to protect their family home and avoid wage garnishments or bank account levies. Although a Chapter 7 or Chapter 13 bankruptcy can extricate you from a mountain of unsecured debt, the actions you take prior to filing bankruptcy can result in a dismissal of your bankruptcy or even expose you to charges of bankruptcy fraud.
The urge to give your boat to a family member or to engage in sham transactions where you sell your motorhome to friends for a dollar is understandable. While it is permissible to engage in pre-bankruptcy planning and asset protection, this must be done carefully to avoid having the transaction undone by the bankruptcy trustee and/or avoid potential bankruptcy fraud allegations.
The U.S. Bankruptcy Code creates a look back period that permits the bankruptcy trustee to analyze all transfers of assets, money and property within two years of filing a petition for a Chapter 7 bankruptcy. This period is called the bankruptcy “look back period," which is actually six years under New York state law. These transactions may be carefully analyzed if the asset is transferred to an insider, such as a family member, friend, business associate or business entity in which the debtor has a financial interest. The bankruptcy trustee also will scrutinize transactions during the look back period when an asset is transferred for less than market value.
If a transaction is determined to have been made to delay payment or defraud a creditor, the trustee may seek penalties against the debtor and seek to reverse the transaction as a fraudulent transfer. When a bankruptcy trustee determines a transaction was fraudulent, the trustee may sue to “unwind" the transaction so that the asset is returned to the bankruptcy estate and made available to pay creditors.
Effective pre-bankruptcy planning can avoid allegations of bankruptcy fraud and the risk of having transactions reversed by the trustee. The Bankruptcy Code provides many exemptions that experienced bankruptcy attorney may use to protect clients’ property. Appropriate pre-bankruptcy planning involves maximizing use of available exemptions, including converting unprotected assets into those that are not subject to distribution to creditors.
When you have assets of substantial value like real estate, motor vehicles, boats and other similar assets that cannot be converted into exempt assets, delaying filing a Chapter 7 bankruptcy maybe be advisable if the transaction is close enough to the six year look back period. If this is not a feasible option, you may still file a Chapter 13 bankruptcy, which will allow you to continue paying for the asset as part of your Chapter 13 bankruptcy payment plan of a term of 3 or 5 years.