The Importance of Planning Exemptions

When most of your clients are typical consumers needing to file bankruptcy, exemption planning isn't something you have to do very often. Most people don't own extravagant property, and certainly aren't part of the mythical set of folk who run out and buy a bunch of stuff in anticipation of bankruptcy. So even the modest exemptions provided by Missouri's Legislature are sufficient to protect the core stuff that people need from day to day. However, some situations do arise from time to time that require a more nuanced look at a person's property and how to exempt it before filing a bankruptcy.

Now, by "exemption planning," I mean taking the available property exemptions and applying them judiciously to my client's available property, thereby maximizing what they can keep after filing a Chapter 7, or minimizing what must be paid to unsecured creditors in a Chapter 13. I do not mean the large-scale transfer of assets to an exempt form on the eve of filing a case - that way lies litigation (as a judge once said "when a pig becomes a hog he gets slaughtered"). You can, in some circumstance (and depending on state law), transfer some assets from a non-exempt form into an exempt form, but care must be taken not to run afoul of the law and open yourself to expensive and risky adversary proceedings in the bankruptcy.

This process really calls for the skills and knowledge of an experienced attorney. Missouri alone has over 40 statutes that purport to exempt property. This doesn't mention the various federal exemption statutes that still apply, nor the mountains of case law devoted to interpreting the statutes. I don't pretend to know all of that, I merely know how to access the information, read it and form an opinion from which you can make a decision (all that bit cost me was three years of school, huge student loan debt, and 10 years of practice). It just isn't reasonable to expect a layperson to know how all that pieces together, and where the pitfalls lay.

Sometimes, a client cannot escape the fact that he or she will have to relinquish some property to the bankruptcy; it can be a tax refund, a car, artwork, season tickets to the local sporting franchise, or a piece of real property (even your home, in some instances). That is the trade-off for filing a Chapter 7 - you give up some property rights in exchange for protection from creditors and a discharge of debt. I have cases where a $1,500 tax refund was surrendered, but $150,000 of debt was discharged. My client complained, but if you could get your credit cards to settle for 1% of what you owed them, you would jump on that in a second.

Losing property in a bankruptcy isn't a failure. Losing property unexpectedly in a bankruptcy is. With proper planning, you can know what is coming, prepare for the eventuality, and even minimize the impact of property loss.