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slaughtered.
By Michael E. Zapin, Esq.
I’m going to focus this discussion on Chapter 7 “fresh start” bankruptcy – also
sometimes referred to as a “straight liquidation.” I want to dive right into the
belly of the beast so to speak, so if you don’t understand the basic concepts of
“fresh start” and “liquidation” or the different types of bankruptcy, head on over to
my website at www.thebankrupter.com and then come back. (Don’t worry. I’ll
wait.)
Your hemorrhaging cash every month, possibly borrowing from Peter to pay Paul.
You’re not in steerage, but you’re not in first class either. Any which way, it
doesn’t matter, because you’re still on the Titanic, and you know it’s only a matter
of time.
And so you try to think ten steps ahead. To do what any good businessperson
ought to do – to plan for the future. And therein lies the problem.
Many states have what’s called an “anti-fraud” statute. The language is usually
similar to that found in the bankruptcy code at 11 U.S.C. § 727, which basically
says, if you transfer property within one year of your bankruptcy filing, and you
do it with “intent to hinder, delay or defraud a creditor” (or the trustee), for one,
the bankruptcy court can “unravel” or reverse your transaction (i.e., recover the
property), and at worst, the court can throw your case out of bankruptcy court.
Now, you’re probably wondering, what in the world does “intent to hinder, delay
or defraud a creditor” really mean? I’m going to be honest with you. I don’t
know. And frankly, neither do the courts.
What makes construing the law particularly difficult is that most courts say that a
modest and reasonable amount of “pre-bankruptcy planning,” or “exemption
planning” is okay. Yet other courts find this behavior unacceptable.
The analysis of those courts that permit exemption planning, seems to be based on
the maxim, “pigs get fat, but hogs get slaughtered.” And most courts agree that
they know a hog when they see one. The difficulty, however, is trying to identify
the pig.
The courts will tell you that the intent to “hinder, delay or defraud” a creditor must
be an actual intent as opposed to a constructive intent. However, this is really just
a term of art. Any way you slice it, the court is going to find “actual intent” based
on the circumstances of the transfer. Most courts will look to what they call
“badges of fraud” to make a determination if you did a transfer with an actual
intent to “hinder delay or defraud.”
Now sure enough, if you answered “yes” to all of the above “badges,” your
transfer will trigger the anti-fraud statutes. But, what if you answered yes to some,
but not all of the above badges? That’s where the analysis can get really sticky.
And some jurisdictions will weigh these badges differently. In other words, the
badges that seem more intrinsically “evil” will be afforded greater weight. Such
as, “concealment” from the court (#7 above); or incurring new debt to fund an
exempt asset (#10 above); or retaining control over an asset after the transfer - a
form of deception (#2 above).
There are some cases that say that engaging in these transfers after consulting with
an attorney (particularly a bankruptcy attorney) is another factor the court can
consider as to whether your transfer was with actual intent to hinder, delay or
defraud a creditor.
It’s quite a quagmire for us bankruptcy attorneys. A delicate dance, if you will,
between coldly advising clients of their rights and the consequences of filing a
case under the client’s present circumstances, or more directly telling a client
outright what he or she should do with his/her assets in order to “maximize” the
use of the client’s exemptions (i.e., the laws that protect the particular asset).
So the best advice to maximize your use of bankruptcy exemptions? Don’t wait for
rain before you purchase your umbrella. Do it while the sun is still shining.
Trigger as few badges of fraud as possible and put as much time in between
whatever it is you are doing, and the ultimate filing of your bankruptcy case.
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Michael E. Zapin has been practicing bankruptcy law for over 17 years. His office primarily
serves the South Florida region. Contact Michael or his staff at The Law Offices of Michael E.
Zapin at (561) 367-1444; by email at thebankrupter@gmail.com ; or visit their website:
www.thebankrupter.com for more information.
“There is life after bankruptcy.”