Let’s say “Jane” doesn’t see a lawyer in time to orderly dissolve the company, and now Big Bank and a few other creditors are coming after her. She hasn’t found a new full time job, and she’s coming to the end of her savings. Pretty soon she won’t be able to pay her credit card bills, most of which are a result of paying for company expenses trying to keep XYZ afloat. Her husband’s income is enough to pay the mortgage and living expenses, but not Jane’s bills on top of that.
Jane has some assets that she wants to keep and not have to turn over to a bankruptcy Trustee. She has a house with about $100,000 in equity, an older car that she owns outright worth $6,000, a retirement account and about $15,000 in the bank. She learned her lesson from XYZ and this time goes to see an attorney before Big Bank files suit against her.
What can Jane do to avoid having to turn over her assets to a Trustee?
A certain amount of exemption planning is permitted under the bankruptcy code. However, sometimes the line between proper exemption planning and fraudulent transfers can be fuzzy.
If, for example, since Jane owns her car outright and it’s worth more than the allowed amount of the vehicle exemption, can Jane sell that car and purchase a new car in which she has no equity? Yes, she can, and should, especially since her car is older and not as reliable as it once was. She can either purchase or lease a new car. If she leases the car, then it isn’t hers and won’t be an asset of the bankruptcy estate at all. If she buys the car and finances the whole thing, the car is Jane’s asset, but there’s no value for the Trustee. The car payments will probably be less than the cost of maintaining an older car so Jane comes out ahead.
What about Jane’s cash in the bank? Jane will most likely not be able to exempt money in the bank unless it represents earnings shortly before the filing. Then she can exempt 75% of the money. But, Jane says, she needs the money to pay property taxes and insurance which come due in the next few months. Jane can, without running afoul of the Trustee, pay the property taxes and insurance early. If she’s going to owe the IRS or State for taxes, she can pre-pay that as well.
Depending on what else Jane and her husband may own, an experienced bankruptcy attorney may be able to show her other things she can do to minimize assets available to the Trustee.. By spending a little money on talking to an attorney ahead of time, Jane can save herself a lot of headaches later on.