Pre-bankruptcy planning is the transferring of non-exempt
assets into exempt assets. This practice is not
in and of itself illegal or improper. The Bankruptcy
Code legislative notes specifically permit this type of
activity. But, this is not to say that the procedure is without
risk. The 2005 changes in the bankruptcy laws challenge
the constitutional right of every person to receive adequate
legal advice from their attorney regarding pre-bankruptcy
transfers or incurring new debt.
Under the old bankruptcy law our
Arizona Bankruptcy judges declared that they "would know
pre-bankruptcy planning that had crossed the line when they
saw it." Some Bankruptcy courts in other states have
been very outspoken about such planning prior to filing a
bankruptcy. At this time there is no single test which has been
universally accepted by all the Bankruptcy Courts in determining
how much pre-bankruptcy planning is too much.
Generally, a number of criteria
appear to have been considered in several cases:
-
What is the amount of the transfer to
exempt property?
-
What is the proximity to the bankruptcy filing?
-
Did the conversion to exempt property involve new funds or previously secured property?
-
Did the conversion benefit insiders of the debtor?
-
Did the debtor mislead creditors during the
conversion?
Other courts have considered additional circumstances in
determining whether or not the pre-bankruptcy planning is
acceptable. The best way to summarize whether or not
pre-bankruptcy planning will succeed is to consider the old
maxim, “pigs get fat and hogs get slaughtered”.
Obviously, it will take years to determine how the new
bankruptcy laws will change this pre-bankruptcy planning
process.
Any attorney participating in pre-bankruptcy planning is incurring some risk if the
planning progresses to a stage where it could be interpreted
as fraud upon creditors. Though normally the Bankruptcy Courts
do not condemn the attorney for the planning, but rather
punish the debtor, in past non-bankruptcy settings, the
Arizona courts have sanctioned attorneys for overly zealous
asset protection tactics. Of course, this may change
under the new bankruptcy laws.
For instance: the new bankruptcy
laws 11 USC Section 526(a)(4) prohibit anyone helping a
consumer in filing for bankruptcy from advising that person
to incur more debt or to pay an attorney, or anyone else,
for help in the a bankruptcy. Obviously, this is just
ridiculous. Did Congress really intend on making it
illegal to pay an attorney, or anyone else, for help in
filing for bankruptcy? Did Congress intend on the
attorney not be able to advice the client to get rid of an
old clunker car and buy a new one before filing for
bankruptcy? The client fully intends on keeping the
payments current on the new car, they just need dependable
transportation. I think not. This is just
another example of how poorly the new law is written.
Debtors whose pre-bankruptcy planning has been successfully
challenged face a variety of repercussions.
Oftentimes, the courts order that transfers shall be undone
and the asset brought back into the bankruptcy estate. For example, a debtor
pays $25,000 toward the debt secured by his residence, so as
to maximize his allowed homestead exemption. The Court
could second guess this payment and order the funds to be
brought back into the bankruptcy estate. At times it
is a gamble whether or not the Bankruptcy Court will find
this type of pre-planning to be "piggish or hoggish".
Under the new law 11 USC Section 522(o) and (p) may
expose any transfers made within 10 years or 3 years 4
months, respectively, into exempt property. This law
does not specifically refer to homestead property and
requires that the property be disposed of with the intent to
hinder, delay or defraud a creditor and that the property
disposed of was not already exempt.
In some situations, courts found the pre-bankruptcy
planning to be so egregious that it justified the debtor
losing his or her discharge and/or sanctioning of the debtor's attorney.
Under the prior law this result was rare, being deprived of a discharge defeats the
entire reason behind bankruptcy and is disastrous for the
debtor. Given the uncertainty in this area it would be
advisable for debtors and their counsel to tread very
carefully. The new law is so confusing that no one,
judges includes, really understand how to deal with issues.
My recommendation: do not be the first one to try aggressive
pre-bankruptcy planning.
To
lawyers: you need to make a decision whether your
constitutional right and ethical duty to give your clients
competent advice, is controlled by this poorly drafted
attempt of the credit card industry to scare everyone,
lawyers included, away from bankruptcy protection.
Bankruptcy Fraud
◙
HIDING PROPERTY IN BANKRUPTCY CASE BRINGS PRISON TERM
Copyright The Associated Press
(Cedar Rapids-AP) -- A Waterloo woman will spend a year in
federal prison for fraudulently concealing property while
filing for bankruptcy. Sandra Risse was sentenced today in U-S
District Court in Cedar Rapids after she plead guilty in June.
The 40-year-old Risse admitted that after her husband died,
she inherited a car and several motorcycles and placed the
titles of some of them in other names. When she filed for
bankruptcy, she didn't list those vehicles. From 1994 to 2000,
Risse received supplemental Social Security income on behalf
of her son. She claimed she owned only one car and a
motorcycle, which she valued at 500 dollars. Authorities say
the vehicles Risse concealed were worth as much as 50-thousand
dollars. She was ordered to pay the government 32-thousand
dollars in restitution.
◙
WISCONSIN MAN FACES BANKRUPTCY
FRAUD CHARGE
Edward DeBoth, 43, is accused of
concealing money to protect it from creditors during a
bankruptcy action in May 2001, according to a federal
indictment.
Edward and his wife Patricia filed
a bankruptcy petition with the U.S. Bankruptcy Court in
Wisconsin. On the petition, DeBoth stated he had no cash on
hand but in fact had at least $11,500, according to the
indictment.
After the discharge, DeBoth and
his girlfriend deposited $19,000 in his girlfriend's bank
account in small increments, to keep its existence hidden, and
then used it as a down payment on a house in Green Bay, the
indictment says. He's charged with bankruptcy fraud and with
structuring. Each crime carries a penalty of up to five years
in prison.
◙
ATTORNEY'S FAILURE TO SCHEDULE ASSETS
Barger v. City of Cartersville, Ga. (11th Cir. 2004)
The
failure to comply with the Bankruptcy Code's disclosure duty
is "inadvertent" only when a party either lacks knowledge of
the undisclosed claim or has no motive for their concealment.
A debtor who failed to disclose the existence of her
employment discrimination lawsuit during the pendency of her
bankruptcy could not escape the consequences, even if it were
her attorney's error.
Although it is undisputed that Barger's attorney failed to
list Barger's discrimination suit on the schedule of assets
despite the fact that Barger specifically told him about the
suit, the attorney's omission is no panacea. As the Supreme
Court stated in Link v. Wabash R.R. Co., "[t]here is certainly
no merit to the contention that dismissal of petitioner's
claim because of his counsel's unexcused conduct imposes an
unjust penalty on the client. Petitioner voluntarily chose
this attorney as his representative in the action, and he
cannot now avoid the consequences of the acts or omissions of
this freely selected agent." "[I]f an attorney's conduct falls
substantially below what is reasonable under the
circumstances, the client's remedy is against the attorney in
a suit for malpractice. But keeping this suit alive merely
because plaintiff should not be penalized for the omissions of
his own attorney would be visiting the sins of plaintiff*s
lawyer upon the defendant."
MORAL TO THIS STORY - THIS IS
YOUR BANKRUPTCY - IT IS ABSOLUTELY YOUR OBLIGATION TO REVIEW
ALL YOUR DOCUMENTS AND MAKE SURE YOU HAVE DISCLOSED
EVERYTHING.
