Pre-Filing Planning For Bankruptcy
Bankruptcy is a powerful legal strategy that can allow individuals an opportunity to discharge (or eliminate) all or a significant portion of their debt. However, bankruptcy is not without risk. An improperly planned bankruptcy can result in the loss of assets, conversion of the case to a different chapter, dismissal, or a denial of discharge.
Pre-filing planning should begin as soon as the decision to file a bankruptcy is made. Often times the decisions made while planning for a bankruptcy will determine the success of the case.
The first consideration in pre-filing planning concerns the protection of one’s assets through the use of exemptions or “exemption planning.” When a bankruptcy case is filed, most of an individual’s assets become property of the bankruptcy estate. This includes an individual’s home, cars, money, stock portfolios, and even the potential to be a plaintiff in a lawsuit. Those assets that are exempt, using the applicable bankruptcy and state statutes, are returned to the debtor.
Proper planning involves a close analysis of the applicable exemptions to determine if certain non-exempt assets should be swapped for exempt assets. For instance, the exemption for a stock portfolio is far more limited than the exemption for equity in a residence. A common strategy where an individual owns a stock portfolio in excess of the allowed limits is to cash the non-exempt stock portfolio and invest the proceeds into the residence. This allows for maximum use of the exemptions and ensures that the funds in the stock portfolio are not lost in the bankruptcy case. The scenarios for proper exemption planning are endless. However, as shown, failing to properly execute an exemption plan can result in lost assets that otherwise could have been retained.
A second consideration is the timing of a bankruptcy filing. Timing of a bankruptcy filing revolves around three distinct factors: 1) priority payments; 2) discharge of debts; and 3) current income.
Priority payments are payments to family members or general creditors whereby your payment prioritizes the creditor above other creditors. The court views this as impermissible since every creditor should be treated the same. As such, payments, within one year of the filing of a bankruptcy, made to family members to repay a debt can be effectively reversed by the bankruptcy trustee in order to distribute the funds to all creditors equally. For payments to non-insiders, payments within three months of the bankruptcy filing may be reversed. If a priority payment has already been made or needs to be made then proper bankruptcy planning involves waiting the applicable time to file the bankruptcy case.
Certain debts may only be discharged after the passage of a set period of time. Most notably, income taxes cannot be discharge until a set period of time has elapsed since the tax return was filed. Filing prior to the expiration of the deadlines will result in the taxes surviving the bankruptcy case. The calculations for exactly when a tax may be dischargeable is complicated and should not be taken lightly. Unfortunately, there have been plenty of cases where an individual files a case only days earlier than they should have and fails to discharge significant tax debt. One last important comment relating to the discharge of taxes is to note that filing tax returns even a day late could result in the tax being rendered forever nondischargeable. When in doubt file the return on time, the risk is too large.
A final factor in the consideration of the timing of a bankruptcy filing is an individual’s income. Eligibility for Chapter 7 bankruptcy is usually determined by the income received within the past six (6) months. Therefore, prior to filing an important consideration is the income that one has received, is currently receiving, and will receive in the near future. If one’s income has been inflated over the past six months, it is advisable to wait to file until the inflated income is no longer in the six month window. If one’s income is expected to dramatically increase in the near future, it may be advantageous to file immediately.
These are just a few of the considerations of pre-filing planning for a bankruptcy. Most importantly, it is critical to have a knowledgeable attorney to assist in proper planning.
– Keith R. Wood is an Associate at Calone & Harrel Law Group, LLP who concentrates his practice in Bankruptcy, Tax collection, and Corporate, Partnership and Limited Liability Company law matters. Mr. Wood may be reached at 209-952-4545 or firstname.lastname@example.org