Planning for Bankruptcy Saves you Money

15 Oct Planning for Bankruptcy Saves you Money

Good planning for bankruptcy can save you money. Bad bankruptcy planning is fraud. Check out this post and this one too. Good bankruptcy planning can prepare you for your future. Bad bankruptcy planning can send you to jail. And no bankruptcy planning is almost as bad as bad bankruptcy planning.

What is bankruptcy planning?

Suppose you are about to file bankruptcy under chapter 7. Let’s say you have $25,000 in savings bonds which a trustee could easily sell, turn to cash and use to pay your creditors. Let’s say that you have $250,000 in debts – mostly from medical bills which you could not pay because your child had a pre-existing condition not covered by insurance. What choices might you make?

Bankruptcy Options

  1. You could do nothing. In Illinois, you could claim a $4,000 wild-card exemption on this property and your bankruptcy trustee would take $21,000 of your bonds and use that to pay your various creditors. The bankruptcy trustee would receive a fee of up to $3,100 for administering this $21,000.
  2. You could pay back an existing creditor – maybe for example your child’s doctor who you want to be able to use in the future. There’s nothing wrong with doing that. But if you do, you’ll have to wait at least 90 days to file bankruptcy. Why? If you don’t the trustee will sue the doctor to recover the payment as a “preference”.
  3. You could pay back mom who lent you money to live during the time you were unemployed. But if you do, you’ll have to wait for a whole year before you file bankruptcy. Why? Not only is payment to Mom a preference but she’s an “insider” – so the trustee could sue her to recover payments made within the past year?
  4. You could buy things you need but that a trustee could not sell easily – for example you could use the $21,000 to buy medical supplies and other items needed for your child’s care. Maybe the trustee could sell these, but probably not and certainly they’d bring less for the estate than cash.
  5. You could pay down the mortgage on your house but be careful – a trustee may not mind your making back payments – a trustee might be very unhappy if you tried to create exempt equity.
  6. You could pay real estate taxes on your house
  7. You could pay your income taxes

There’s a saying that “pigs get fat and hogs get slaughtered.” Good bankruptcy planning makes your life better. Bad bankruptcy planning leads to loss of discharge and possibly even criminal prosecution. So we’ll discuss bad bankruptcy planning in our next post.

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Jay S. Fleischman is a bankruptcy lawyer with offices in Los Angeles and New York. He can often be found on Google+ and Twitter, where he shares information about consumer protection issues and personal finance.
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