14 Oct Planning for Bankruptcy – Using your Exemptions – One of a Continuing Series
Planning for bankruptcy can be similar to planning to file your income tax returns. You have to be accurate. You have to be honest. But you do have the right to engage in some planning before you file. You do have the right to do things legally to leave yourself in the best position possible.
What is an Exemption?
State and federal law provide that some of your property can’t be taken by creditors if you are in debt. In bankruptcy, this is important. You can claim some of your property to be exempt. You can keep exempt property even if you file a bankruptcy case. Your bankruptcy trustee can sell your non-exempt property to pay your creditors. Exemptions vary from state to state. Some states let you select exemptions allowed by the Federal system under the bankruptcy code, some do not. And if you moved in the past two years, you may have to use the exemptions of the state you used to live in or perhaps the federal exemptions. This change was designed to keep you from moving into an exemption friendly state and then file a bankruptcy. However, this might work to your benefit if you moved from such a state to an exemption-unfriendly state.
Pigs get fat and hogs get slaughtered
You may want to arrange your assets so that more property is exempt. Maybe you could acquire some tools of trade instead of having a large cash balance in a bank account. You could pre-pay some rent on your apartment to create a homestead exemption if your state allows that. You could make a contribution to an IRA or a Health Savings Account.
The courts of most circuits have approved a degree of exemption planning. However, the laws of some states, like Illinois, specifically state that conversion of assets from non-exempt to exempt form is presumed to be in fraud of creditors. In Illinois, the “look-back” period is 6 months.
Worse, if you try to convert too much of your property into exempt assets, a trustee or creditor might seek to bar your discharge in bankruptcy. Discuss your situation with an experienced attorney, like those on the Bankruptcy Law Network, so that you can prepare in an informed and reasonable fashion.
Lakelaw represents people in bankruptcy cases in Chicago, Cook County and Lake County Illinois as well as in Kenosha, Racine and the Milwaukee metropolitan area.
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