Craig W. Andresen is a consumer bankruptcy lawyer in Bloomington, Minnesota, with 22 yearsâ€™ experience in consumer and small business bankruptcy cases. He is the Minnesota chair of the National Association of Consumer Bankruptcy Attorneys, and is a member of the Minnesota State Bar Associationâ€™s Bankruptcy Section. Mr. Andresen lectures often on the topic of consumer bankruptcy at local and national legal seminars.
Even before the 2005 Bankruptcy Reform Act's addition of Sections 522(o), 522(p), and 522(q) to the bankruptcy law, lawyers were careful when advising clients about exemption planning. Under the old law, it was still possible for the client to lose his or her discharge if exemption planning was not done "right." A lawyer typically would have the client sign an acknowledgement that he or she had been informed of the risk of losing the discharge, and that the client proceeded with the exemption planning at his or her own risk.
If you're considering bankruptcy, you're no doubt concerned about avoiding the loss of money or property to your creditors. Fortunately, although rules vary from state to state, most consumer debtors won't lose any assets in a bankruptcy. This is because the exemptions (the laws protecting your property from loss to creditors) are liberal and usually will protect most, if not all, of your assets. However, if you own two homes, expensive vehicles, a large stock portfolio, or other valuable or unencumbered assets, you may be told by your lawyer that some of your assets cannot be claimed as exempt. In a bankruptcy, non-exempt assets are sold by the trustee to pay your creditors. Ouch!
But what if you could sell an asset you would otherwise lose, before you file the case, and use those cash proceeds to (1) obtain an asset that would be exempt, or (2) pay down a loan against an exempt asset? This is called "exemption planning." The question is whether it is still advisable to undertake exemption planning under the new Bankruptcy Reform Act.
You may have heard that a bankruptcy lawyer can't legally advise a client to incur new debts before filing bankruptcy. In fact, Section 526(a)(4) of the new bankruptcy law contains this odd-sounding rule, but what does it really mean? Does it mean your lawyer is forbidden from fully advising you about your options? Are you prevented from getting legal advice about incurring a debt, before you file for bankruptcy? If so, how will you know if it's a good idea? Isn't that what lawyers are for, getting advice? But the law says your bankruptcy lawyer can't advise you about it, right? What is the client to do?