What is Bankruptcy Exemption Planning?

Each individual who files bankruptcy is entitled to a set of property exemptions, a series of statutory allowances for property that can be protected from creditors. The most important time for the application of these allowances is the moment the bankruptcy petition is filed. As a consequence, that means that choices and actions of the bankruptcy debtor in the period of time immediately before filing can change the extent of protection available for his or her property.

Bankruptcy exemption planning is the exercise of making choices in the pre-bankruptcy period to maximize amount of protection provided by the applicable exemption laws. Exemption planning should always be undertaken on the advice of informed bankruptcy counsel, as there can risks associated with overly aggressive planning activity.

One could divide exemption planning into two sorts: affirmative planning and protective planning.

Affirmative Exemption Planning

At its extreme, affirmative exemption planning involves moving clearly non-exempt value into an asset that can be exempted. Unsurprisingly, this is the area most likely to cause problems in a case. Related would be a practice of spending down a non-exempt asset while an exempt asset accumulates. The classic example is letting exempt social security benefits accumulate in a separate account while spending down ordinary savings.

Protective Exemption Planning

Protective exemption planning involves an appreciation of what exemptions presently apply, and not taking actions that dilute or diminish them. Some protective practices would include avoiding co-mingling exempt and non-exempt funds, and avoiding payments that bring the net value of an asset over the exemption amount.