What is Bankruptcy Exemption Planning?

  • By:Lars Olsen
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The main purposes of the bankruptcy laws are to:

  • Give an honest debtor a “fresh start” by relieving the debtor of most debts, and
  • Repay creditors in an orderly manner to the extent that the debtor has property available to do so.

One of the primary ways that the bankruptcy law attains its goal of providing debtors with a “fresh start,” is by providing debtors with certain “exemptions” that protect their property from creditors and put it beyond the reach of the bankruptcy trustee.

Bankruptcy exemption planning is the process of making deliberate choices concerning a debtor’s property before filing bankruptcy, to maximize the exemption protections provided by the bankruptcy law.

Warning: Bankruptcy Exemption Planning Can Be Dangerous.

Most people who file for bankruptcy do not lose anything they own because they often file a Chapter 7 bankruptcy and everything they own is “exempt.” Or, if they have non-exempt property, they file a Chapter 13 and are able to use its “adjustment of debts” option to protect their “non-exempt” assets. But bankruptcy is not a “one size fits all” proposition, so this isn’t always the case. Sometimes a debtor may have assets that are not exempt, but cannot be protected well through a Chapter 13. That’s when exemption planning can be very beneficial.

That is not to say that exemption planning is simple. It isn’t. It consists of developing strategies for managing and positioning your assets before you file for bankruptcy so those assets are protected once you do file. Those strategies may better enable you to pay certain creditors that you want to pay, or need to pay, over others that you don’t. But there are risks associated with exemption planning. Because of the dangers associated with exemption planning, especially over-aggressive planning, bankruptcy exemption planning should always be undertaken with the assistance of experienced and informed bankruptcy counsel.

As noted above, one of the main tenants of bankruptcy law is that honest debtors should be allowed to discharge their debts, and the law provides exemptions to allow them to do so. On the other hand, bankruptcy is not meant to benefit dishonest debtors. Section 727(a)(2) of the Bankruptcy Code prohibits any debtor who attempts to defraud creditors by transfers of property, from being discharged. Clearly, then, there is a tension in the law with regard to how much you are allowed to sell or transfer before filing for bankruptcy. To properly engage in exemption planning, you will need the advice of an experienced and highly competent bankruptcy attorney to guide you as to the safest way to engage in asset protection and other strategies, and to inform you on which strategies are likely to be safe, and which are risky.

Don’t Go it Alone!

If you have assets that are not exempt but can’t be protected well through Chapter 13, or are simply considering filing bankruptcy, you may well benefit from pre-bankruptcy planning. If you are in Portland, Eugene, Coos Bay, Medford, or any other city in Oregon, we have an office near you, and we provide free initial case consultations. To schedule an appointment, give us a call or send us an email.

Posted in: Bankruptcy, Chapter 13 Bankruptcy, Chapter 7 Bankruptcy

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