What Should You Know About Converting Non-Exempt to Exempt Assets Before Filing Chapter 7 Bankruptcy?

Question from Ellis, What Should You Know About Converting Non-Exempt to Exempt Assets Before Filing Chapter 7 Bankruptcy?

Answer from AI:

Filing for Chapter 7 bankruptcy can be a complex process, especially when it involves converting non-exempt assets to exempt assets shortly before filing. This memo provides general information on this topic, but it is crucial to consult with a legal professional for personalized advice.

Understanding Exempt and Non-Exempt Assets

In bankruptcy, assets are categorized as either exempt or non-exempt:

• Exempt Assets: These are assets that you are allowed to keep during and after the bankruptcy process. Common examples include a portion of the equity in your home, certain personal property, and retirement accounts.
• Non-Exempt Assets: These are assets that can be sold by the bankruptcy trustee to pay off your creditors. Examples include valuable collections, second homes, and non-essential vehicles.

Conversion of Assets Before Filing

Converting non-exempt assets to exempt assets before filing for bankruptcy is a common strategy, but it must be done carefully to avoid legal issues. Here are some key points to consider:

1. Timing: Converting assets too close to the filing date can be seen as an attempt to defraud creditors. In your case, converting $200,000 of non-exempt equity to exempt assets just two months before filing may raise red flags.
2. Intent: The bankruptcy trustee will examine your intent. If the conversion appears to be done solely to shield assets from creditors, it could be challenged.
3. State and Federal Exemptions: Different states have different rules about what assets are exempt. Some states allow you to choose between state and federal exemptions. Understanding these rules is crucial.

Potential Legal Issues

Converting non-exempt assets to exempt assets can lead to several legal issues:

• Fraudulent Transfer: Under 11 U.S.C. § 548, the trustee can avoid transfers made with the intent to hinder, delay, or defraud creditors if they occurred within two years before the filing date.
• Objections from Creditors: Creditors can object to the discharge of your debts if they believe you have acted in bad faith.
• Denial of Discharge: If the court finds that you have committed fraud, your entire bankruptcy discharge could be denied under 11 U.S.C. § 727.

Steps to Take

If you are considering converting non-exempt assets to exempt assets before filing for Chapter 7 bankruptcy, here are some steps you should take:

1. Consult a Bankruptcy Attorney: Given the complexity and potential legal pitfalls, it is crucial to consult with a bankruptcy attorney who can provide personalized advice.
2. Document Everything: Keep detailed records of all transactions and the reasons behind them. This can help demonstrate that you did not intend to defraud creditors.
3. Understand Exemption Laws: Familiarize yourself with the exemption laws in your state. Resources like the [U.S. Courts Bankruptcy Basics](https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics) can be helpful.
4. Be Transparent: Full disclosure of all assets and transactions is essential. Hiding assets or transactions can lead to severe penalties.

When to Seek Legal Advice

Given the potential for serious legal consequences, it is highly recommended to seek legal advice if you have converted non-exempt assets to exempt assets before filing for Chapter 7 bankruptcy. A qualified bankruptcy attorney can help you navigate the complexities and ensure that you comply with all legal requirements.

For more detailed information, you can refer to the [Bankruptcy Code](https://www.law.cornell.edu/uscode/text/11) and other relevant legal resources.

Remember, this memo provides general information and should not be considered legal advice. Always consult with a legal professional for advice tailored to your specific situation.