What to Know About Protecting Assets in Bankruptcy

If you are overwhelmed by debt, bankruptcy is a legal way out. But the fear of losing your home and cars stops many people from going that route. Fortunately, bankruptcy laws have provisions that protect certain assets so you can keep the basic necessities of life.
Knowing the exemptions in Chapter 7 and Chapter 13 bankruptcy is key if you are considering this route. These exemptions will determine what you can keep and how to navigate the bankruptcy process.
What Are Exemptions in Bankruptcy?
Exemptions are legal provisions that allow debtors to protect certain assets from creditors during bankruptcy. In short, exemptions are what you get to keep when you file for bankruptcy. Both federal and state laws have exemptions and in some cases, you can choose between the two depending on which one gives you better protection for your assets.
Federal vs. State Exemptions
- Federal Exemptions: These are under the U.S. Bankruptcy Code and are the same across all states. They cover essentials like part of home equity, vehicle equity, personal property and retirement accounts.
- State Exemptions: This varies by state. Some states require you to use their exemptions, while others let you choose between state and federal exemptions.
Reference: United States Courts - Bankruptcy Basics
Protecting Your Valuable Assets in Chapter 7 Bankruptcy
Chapter 7 bankruptcy, also known as “liquidation bankruptcy,” allows you to discharge unsecured debts like credit cards and medical bills. However, it comes with the risk that a court-appointed trustee can liquidate non-exempt assets to pay creditors.
Key Exemptions in Chapter 7
- The bankruptcy exemptions include the Homestead Exemption, which protects equity in your primary residence up to a certain amount (the federal exemption was $27,900 as of April 2022, and some states, like Texas and Florida, offer unlimited exemptions).
- The Vehicle Exemption allows you to keep equity in a vehicle up to $4,450 (federal exemption).
- Personal Property Exemptions cover items like clothing, household goods, and tools of the trade with specific limits.
- Most tax-exempt retirement accounts are typically fully protected.
Asset Protection Strategies
- Asset Protection Strategies include accurate valuation of your assets to avoid unnecessary liquidation.
- Consult with a bankruptcy attorney to determine whether federal or state exemptions better protect your assets.
- Be aware that some states have an unlimited exemption.
Note: Always consult a qualified bankruptcy attorney to navigate these exemptions effectively.
Protecting Your Assets in Chapter 13 Bankruptcy
Chapter 13 is a “wage earner’s plan” that allows you to create a plan to pay all or part of your debts over 3 to 5 years. One of the big advantages is you get to keep all your property, both exempt and non-exempt.
How Chapter 13 Protects Your Assets
- You pay creditors through a court-approved repayment plan based on your disposable income instead of selling assets.
- Cramdown provisions allow you to modify certain secured debts, potentially reducing the principal on items like cars to their current value.
- An automatic stay stops foreclosure and creditor call when you file.
Benefits of Chapter 13
- Keep all your assets as long as you make the plan payments.
- Consolidate all your debts into one monthly payment.
- Experience less damage to your credit score compared to Chapter 7 bankruptcy.
The Legal Risk of Hiding Assets in Bankruptcy
While it is legal to protect assets through exemptions, hiding assets is illegal and fraud. Misinformation and bad advice can lead you down a slippery slope with big consequences.
Common Ways to Conceal Assets
- You can transfer assets by moving property to a relative or friend's name before filing.
- Undervaluing assets involves reporting assets for less than they're worth.
- Omitting assets means not listing all assets in bankruptcy schedules.
- Fake liens are created by making up debts to reduce equity in assets.
Consequences of Bankruptcy Fraud
- The court can deny the discharge of debts in a denial of discharge, making you responsible for all of them.
- Bankruptcy fraud is a federal crime that can result in criminal charges with fines and up to 5 years in prison.
- Trustees can initiate asset recovery actions to reverse fraudulent transfers and take the hidden assets.
- Courts can take away your right to exemptions on certain assets in a loss of exemptions.
How Trustees Find Fraud
- Financial records review involves examining bank statements, tax returns, and property records.
- Public records search includes looking for property transfers and liens.
- Credit reports are checked for debts and credit activity leading up to filing.
- Tip-offs can come from ex-spouses, business partners and creditors.
- The Department of Justice provides reference information on bankruptcy fraud.
Ways to Legal and Ethical Asset Protection
To get through bankruptcy successfully, you must use legal strategies, not fraud.
Consult a Bankruptcy Attorney
- An attorney will guide you on which assets are exempt and how to get the most protection.
- Professional advice will ensure you comply with state laws, as bankruptcy laws vary by state.
- Assessing your situation involves determining which bankruptcy chapter is most beneficial for you.
- Maximizing exemptions means legally protecting as many assets as possible.
- Developing a feasible plan requires creating a realistic repayment plan under Chapter 13.
- Ensuring compliance involves avoiding pitfalls that could lead to allegations of fraud.
Pre-Bankruptcy Planning
- Asset conversion is legally converting non-exempt assets into exempt assets before filing.
- Budget adjustment means reducing expenses to increase disposable income for a Chapter 13 plan.
- To avoid preferential payments, do not repay debts to family members or friends before filing.
Conclusion
Whether to file Chapter 7 or Chapter 13 bankruptcy depends on your financial situation and long-term goals. Protecting assets legally requires planning and professional guidance. Hiding assets is illegal and not feasible, as it attracts serious penalties, even the loss of bankruptcy protection.
References:
- United States Courts. (n.d.). Bankruptcy Basics. Retrieved from https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics
- Cornell Law School. (n.d.). 11 U.S. Code § 522 - Exemptions. Retrieved from https://www.law.cornell.edu/uscode/text/11/522
- Department of Justice. (n.d.). Bankruptcy Fraud. Retrieved from https://www.justice.gov/ust/bankruptcy-fraud
- National Association of Consumer Bankruptcy Attorneys. (n.d.). Retrieved from https://www.nacba.org/
Disclaimer: This article is for informational purposes only and does not constitute legal advice. Please consult a qualified attorney for advice on your specific situation.