How to Maximize Your Bankruptcy Exemptions

Consider ways you might maximize your bankruptcy exemptions so you can protect more of your property in bankruptcy.

If you are considering filing for bankruptcy, doing some pre-bankruptcy planning can maximize your exemptions and increase the amount of property you get to keep. Exemption planning can range from timing your bankruptcy filing to converting your nonexempt assets into exempt ones. It is usually permissible to engage in a certain amount of exemption planning prior to filing. However, be aware that if you do it to excess or with the intent to defraud your creditors, it may be considered fraud. Read on to learn more about what you can do to maximize your exemptions in bankruptcy.

To learn about bankruptcy exemptions and how they protect your property, see our Bankruptcy Exemptions topic area.

Time Your Bankruptcy to Take Advantage of the Best Exemptions Available

Each state, and the federal system, has its own unique set of bankruptcy exemptions. Certain states offer you a choice between state and federal bankruptcy exemptions. However, most states require you to use state exemptions. If you have a choice, review both sets of exemptions and use the one that allows you to protect more of your assets (you cannot mix and match between the two systems). To find out if your state allow you to use the federal bankruptcy exemptions, and that is exempted in the federal scheme, see The Federal Bankruptcy Exemptions.)

In addition, exemption planning can be even more important if you recently moved to a new state. This is because you normally need to be domiciled (permanently residing) in a state continuously for two years before you can use its exemptions. If you moved within the last two years, you may be required to use your prior state’s exemptions. To learn the details of these domicile rules, see Which Exemptions Can You Use in Bankruptcy?

Depending on each state’s exemption laws, you may need to file quickly to take advantage of your old state’s exemptions (after two years you will be required to use the new state’s exemptions) or delay your bankruptcy until you are eligible to use the exemption system of your new state. As a result, consider reviewing each state’s exemptions prior to filing and time your bankruptcy accordingly. (To find the exemptions in each of the 50 states, click on your state in Bankruptcy Information for Your State.)

Follow the Proper State Procedures for Exempting Property

In some states, you may need to follow certain procedures or file additional documents before you can take advantage of particular exemptions in bankruptcy. For example, certain states require you to file or record a homestead declaration before you can use their homestead exemption. Prior to filing your bankruptcy, make sure to review and follow all of your state’s rules regarding its exemptions.

To find out if your state requires a homestead declaration, see The Homestead Exemption in Bankruptcy, and click on the article that pertains to your state.

Minimize Your Nonexempt Property

If you own nonexempt assets but you still have unused exemptions, you may be able to sell or exchange some of your nonexempt property for things you can exempt. Reorganizing your assets to take full advantage of your exemptions is permissible if done within reason.

For example, if you have more money in the bank than you can exempt, you can spend it on food, clothing, or other necessities for you and your family prior to filing your bankruptcy. Also, you may be able to purchase exempt assets with the proceeds you receive from selling your nonexempt property.

However, conversion of nonexempt property into exempt assets should not be excessive or egregious. Courts have differing opinions on when this type of exemption planning can rise to the level of bankruptcy fraud. When evaluating your actions, courts generally consider whether you tried to hide the conversion, when it took place, and the value of the assets involved. Since each jurisdiction is different, consider talking to a knowledgeable bankruptcy attorney in your area before converting your nonexempt assets into exempt ones prior to bankruptcy. To find a bankruptcy attorney in your area, visit Nolo's Lawyer Directory.

Delay Your Bankruptcy If Necessary

Exemption planning is also important if you are entitled to money or another asset but have not yet received it. This is because property you are entitled to is considered part of your bankruptcy estate even if you haven’t received it. The most common example of this is your tax refund.

If you are going to get a sizeable refund and you can’t exempt it in your bankruptcy, consider delaying your filing until you receive the refund and spend it. You can usually spend your refund on things like food, clothing, or rent before you file your bankruptcy. Otherwise, the bankruptcy trustee will take your nonexempt refund and distribute it to your creditors.

Learn more about delaying your bankruptcy to protect a tax refund.

To learn more about what to consider before you file for bankruptcy, see Bankruptcy Filing Considerations & Prebankruptcy Planning.

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