Exemptions in bankruptcy are used to protect property that the client owns or recently sold or transferred. Planning to use exemptions in bankruptcy may dictate waiting a little bit to file, depending upon the value of the asset or the type of transfer that was made.
Exemption planning is perfectly legal and is akin to tax planning—arranging your financial life to take advantage of the laws available to protect your property.
Homestead Exemption
The homestead exemption gives you up to $35,000 in exempt equity (Fair Market Value minus Mortgages). If the client acquired the property within 1215 days of filing for bankruptcy, the bankruptcy attorney may recommend waiting out the remainder of that period.
Spending Excess Cash
For the few bankruptcy clients who have cash in excess of what is allowed in bankruptcy, your bankruptcy attorney may recommend spending down some of the cash prior to filing. So long as the cash is spent on non-luxury items, this is perfectly fine and converts cash to usable items like food, household goods, clothing, etc. Cash that has been converted to household goods can use the household goods exemption in the bankruptcy filing.
Recent Transfers
Transfers made within the last two years to non-family members and non-friends are subject to review by the bankruptcy trustee. The same is true of transfers to family members and friends (Commonly known as “insiders”) which require a four-year wait period to be outside the reach of the trustee. Exemptions in bankruptcy can be used to exempt these transfers but waiting out the period may be the client’s best bet.
Recent Credit Card Use
If you’ve used your credit cards within 90 days of filing to purchase goods of $550 or more with one creditor, under 523(a)(2)(C), there is a presumption that the purchase was fraudulent—in other words, you knew you were going to file bankruptcy when you made the purchase. The same is true of cash advances in excess of $825 if made within 70 days of filing.
These presumptions are rebuttable, meaning the attorney can argue that the specific facts dictate that the debt should be discharged, but waiting a few more weeks to file is usually a much safer bet.
Tax Refunds
If you expect a tax refund, that money is already part of your bankruptcy estate. It’s an asset that you have to protect. However, if you wait to file until you’ve received the refund and spent it on non-luxury items, you can file bankruptcy without worrying whether the court will try to take your refund.
Call An Attorney
If you have any questions about exemptions in bankruptcy, the timing of filing, or anything else related to debt and bankruptcy, please call me at 704.749.7747. I’m here to help and the call is free.