Exemptions are laws which provide for the retention of certain assets by an individual even if they owe money to creditors. Exempt assets cannot be touched by most creditors and are beyond the reach of a Bankruptcy Trustee. Exemptions are set by Federal and Ohio statutes and are intended to protect people from becoming destitute without the ability to provide for their own sustenance or basic needs. One of my previous articles explains more about Bankruptcy Exemptions.
Exemption planning is the purposeful arranging of a person's financial affairs to maximize the benefits of the Exemptions available to them. This can involve the expenditure of nonexempt money on necessities or the sale of nonexempt assets and the use of the sales proceeds for legitimate purposes. It can also involve the disposition of assets or the use of nonexempt assets to retire non-dischargeable debts prior to filing a bankruptcy action.
To most people, it sounds strange that someone contemplating bankruptcy protection could have too much cash. However, such a dilemma is a common occurrence. Most individuals seeking bankruptcy protection have some form of income even if that income is insufficient to meet their financial obligations.
When a bankruptcy petition is filed, most income received after the petition is filed is not part of the bankruptcy estate and the bankruptcy trustee cannot touch those funds. The exceptions to this rule are life insurance proceeds, inheritances and marital property settlements which do become part of the bankruptcy estate if the debtor becomes entitled to receive them within the six month period following the date on which their bankruptcy petition is filed.
On the other hand, money held by the bankruptcy debtor on the date their petition is filed is part of the bankruptcy estate and, unless the amount of cash on hand is less than or equal to the exemptions to which the debtor is entitled to claim, the Trustee could demand the debtor turnover the excess fund to pay creditors. The same is true of other assets, such as vehicles, jewelry and any other asset the value of which exceeds permissible exemptions.
If you already have cash that exceeds the exemptions to which you are entitled, but don't have any other nonexempt assets, you won't need to sell anything. If, however, you have an asset, such as a vehicle, which exceeds the exemptions you can claim in that asset (Ohio's exemption for motor vehicles was $4,000.00 at the time this article was published), then you may need to sell the asset and convert it to cash.
If the sale of an asset is necessary, ALWAYS REMEMBER you can't transfer the asset to a friend or family or sell it to them for less than fair market value. Such a conveyance would likely be adjudged fraudulent and could be set aside by the Bankruptcy Trustee. In fact, all pre-petition transactions and conveyances between debtors and their friends and family will be subjected to a great deal of scrutiny even if they were legitimate, arms-length transactions. With that in mind, it is always better to sell nonexempt assets to disinterested third parties for fair market value.
Here are some legitimate things you can do with your nonexempt money. Keep in mind, this list is not exhaustive and any reasonable, legitimate expenditure should pass the good faith test. Nevertheless, you should always seek legal advice from your Bankruptcy Lawyer before make any financial decisions as they could have an adverse effect on your bankruptcy case.
Many people contemplating bankruptcy have deferred much needed medical care because they were using their money in an attempt to pay their debts. Routine medical care as well medical care aimed at treating an acute or chronic medical problem are legitimate expenses which are beyond the purview of the Bankruptcy Trustee and the Bankruptcy Court. If you need dentures, eye care or knee surgery, it is perfectly fine to spend your excess cash on such treatment.
Elective medical procedures are entirely different. Of course, sometimes it is difficult to distinguish between necessary and elective medical care. For example, while dentures could be considered elective, if you suffer serious pain as a result of dental issues or your teeth are unkept and consumed with decay, the treatment of those conditions would probably be beyond reproach. If, instead, you decide to have expensive veneers replace teeth that are, otherwise, healthy or cap your teeth in gold for aesthetic purposes, such conduct would probably cross the line. Likewise, having cosmetic surgery to lift your eyelids solely to improve your looks would probably be considered unnecessary while lifting your eyebrows because they obstruct your vision would be legitimate.
At the end of the day, you have to use common sense and should discuss such expenses with your attorney.
If your rent is due on the first of the month and you intend to file your Bankruptcy Petition before that date, go ahead and pay your rent or mortgage early before filing your Bankruptcy Petition.
Money, held in a retirement accounts, is exempt to the extent necessary to support yourself and your family. For the most part, Bankruptcy Trustees and Bankruptcy Courts don't question the amount of money held in retirement accounts, such as 401(K) and Individual Retirement Accounts, regardless of the amount on deposit in those accounts. Regardless, retirement accounts with vert large balances could be attacked.
Making a contribution to an IRA account is, therefore, a legitimate use of nonexempt money. Nevertheless, the Trustee can question this use of your money especially if you have never made an IRA contribution until shortly before filing your Bankruptcy Petition. Accordingly, be cautious when making IRA contributions and it is better to contribute as little as possible and find others ways to deal with the rest of your excess cash.
Most people pay for their car insurance in monthly installments. If you have nonexempt cash, you can pay the full amount outstanding for the rest of the insurance term to eat up that excess cash.
Another area of financial planning, which is often neglected by people suffering financial problems, is Life Insurance. Cash Value Life Insurance (otherwise know as "Whole Life Insurance") is exempt under Ohio law provided the beneficiary is a spouse or a child of the debtor regardless of whether the child is still a dependent. Excess cash can, therefore, be used to purchase life insurance provided the expenditure is reasonably calculated to protect your spouse and/or children from being destitute. Obviously, if you have a large sum of nonexempt cash and use it to purchase an extremely large Life Insurance Policy, that transaction could be scrutinized by the Bankruptcy Court and Trustee.
Some debts, like, student loans, child support obligations and certain tax obligations are non-dischargeable. That means those debts will survive your bankruptcy filing and you will still be responsible for paying them even after your other debts are discharged by the Bankruptcy Court. You can, therefore, use excess cash to pay these obligations.
Still, it is important to be reasonable in these payments and to plan your bankruptcy filing so the payments are made more than 90 days before your bankruptcy petition is filed. If they are made less than 90 days before the filing of your bankruptcy petition, they would be considered to be what the Bankruptcy Code calls "Preference Payments" which are recoverable by the Trustee. Moreover, very large payments on debts which are made even more than 90 days before your bankruptcy petition is filed could be considered excessive. So, again, it is important to exercise common sense and be reasonable in the debts you pay before filing a bankruptcy petition.
If you or your family need clothes, it is perfectly legitimate to buy them before filing your Bankruptcy Petition. Again, you should use common sense when doing so. Fur coats, designer dresses, silk underwear and the like are probably not going to go over well if you file bankruptcy shortly thereafter. Buying some Levis for the kids probably won't pose such a problem.
Like clothing, food is another necessity on which you can safely spend money without much scrutiny from the Bankruptcy Court or Trustee. Buying a months supply of food is reasonable provided you aren't buying caviar or vintage wine.
Another legitimate use of nonexempt cash is making repairs to necessities such as vehicles used for transportation and home repairs. This doesn't mean you can remodel your kitchen with state of the art appliances and the finest Italian marble or convert the family pickup truck into a lowboy or a dragster. But, replacing those bald tires on the family truckster or buying a refrigerator that actually keeps food cold are expenditures that won't likely cause a problem in your bankruptcy.
It is important to remember to use common sense and be reasonable when spending excess cash, or disposing of other nonexempt assets, prior to filing bankruptcy. There is a popular saying in bankruptcy circles that, when conducting exemption planning, "Pigs get Fed, Hogs get Slaughtered." It just means that, if you go to extremes with your exemption planning, it is more likely the Bankruptcy Court will condemn your actions and allow the Bankruptcy Trustee to set aside the transactions, deny your claimed exemptions or deny the Bankruptcy Discharge of your debts. While it is only natural to want to retain assets to help make a fresh start after your bankruptcy case is concluded, you must be reasonable and exercise caution when doing so in order to protect your primary objective of discharging your debts.
Another important concern, when conducting exemption planning, is timing. The more time you put between the disposition of assets and the filing of your bankruptcy petition, the less likely your actions will be scrutinized. I advise my Clients to begin planning their bankruptcy filing as early as possible especially when their financial affairs are complicated or they own nonexempt property. If you wait until your house is in foreclosure or your car has been repossessed, you will likely be without sufficient time to conduct exemption planning and, as a result, may lose important assets which could have been protected if more time were available.
Sometimes, a debtor may have so many assets they can't protect them. In such a situation, there are really only 3 options: (1) Refrain from filing bankruptcy and seek a resolution of your debts directly with your creditors. However, you should remember that settling outstanding debt obligations directly with a creditor for less than the full amount owed on the account may create tax liabilities on the amount of the debt forgiven; (2) File a Chapter 7 Bankruptcy action and let the Chapter 7 Trustee sell your nonexempt assets for the benefit of your creditors; or (3) File a Chapter 13 Bankruptcy action and enter a Chapter 13 payment plan to protect and retain your assets.
Many people have a negative view of Chapter 13 Bankruptcy. This is often because they don't understand the Chapter 13 Bankruptcy process or the benefits it offers. You can visit my website to read more about the voluminous Benefits of Chapter 13 Bankruptcy.
Bankruptcy laws are complex. While attorneys fees aren't cheap, hiring a Bankruptcy Attorney may mean the difference between saving or losing your house, your car or other essential assets. If you are suffering with financial problems, before you make any financial decisions you need to seek the advice of an experienced Bankruptcy Attorney. Without that advice, you could inadvertently convert exempt assets into nonexempt assets or lose property which could be kept with adequate exemption planning.