Before anyone files a bankruptcy case, some planning should take place. That planning may involve making sure all the necessary qualifications are met and also may involve a more in depth process involving assets and debts.
One of the main goals aside from getting a discharge of your debts is also to emerge from your bankruptcy with as much of your assets as possible. The best case scenario is to lose none of your assets and get a discharge of all of your debts.
This process of bankruptcy planning is not always easy and it is very important that mistakes are not made that can jeopardize your ability to get a discharge of your debts or lose assets that you were trying to protect. It can be a fine line between maximizing the exemptions you can claim in bankruptcy and actions that hinder, delay or defraud your creditors.
There is a general principle that debtors are entitled to exempt (protect) property for a fresh start, despite creditors having claims and wanting to take property to satisfy their claim(s). In Arizona, most of the exemptions (not all) are found in Title 33 of the Arizona Revised Statutes. Here are some of the relevant excerpts of the exemptions. Note that we have not included the full statutes below, only portions of the statutes that are often of most interest to clients.
Homestead Exemption (ARS 33-1101)
1. The person’s interest in real property in one compact body upon which exists a dwelling house in which the person resides.
2. The person’s interest in one condominium or cooperative in which the person resides.
3. A mobile home in which the person resides.
4. A mobile home in which the person resides plus the land upon which that mobile home is located.
Household Furnishings Exemption (ARS 33-1123)
Household furniture and furnishings, household goods, including consumer electronic devices, and household appliances personally used by the debtor or a dependent of the debtor and not otherwise specifically prescribed in this chapter are exempt from process provided their aggregate fair market value does not exceed six thousand dollars.
Personal Property Exemption (ARS 33-1125)
1. All wearing apparel not in excess of a fair market value of five hundred dollars.
2. All musical instruments provided for the debtor’s individual or family use not in excess of an aggregate fair market value of four hundred dollars.
3. Domestic pets, horses, milk cows and poultry not in excess of an aggregate fair market value of eight hundred dollars.
4. All engagement and wedding rings not in excess of an aggregate fair market value of two thousand dollars.
5. The library of a debtor, including books, manuals, published materials and personal documents not in excess of an aggregate fair market value of two hundred fifty dollars.
6. One watch not in excess of a fair market value of one hundred fifty dollars.
7. One typewriter, one computer, one bicycle, one sewing machine, a family bible, a lot in any burial ground, one shotgun or one rifle or one pistol, not in excess of an aggregate fair market value of one thousand dollars.
8. Equity in one motor vehicle not in excess of six thousand dollars. If the debtor or debtor’s dependent is a person with a physical disability, the equity in the motor vehicle shall not exceed twelve thousand dollars.
9. Professionally prescribed prostheses for the debtor or a dependent of the debtor, including a wheelchair.
Money Benefits Exemption (ARS 33-1126)
1. All money received by or payable to a surviving spouse or child on the life of a deceased spouse, parent or legal guardian, not exceeding twenty thousand dollars.
3. All monies received by or payable to a person entitled to receive child support or spousal maintenance pursuant to a court order.
9. A total of three hundred dollars held in a single account in any one financial institution as defined by section 6-101. The property declared exempt by this paragraph is not exempt from normal service charges assessed against the account by the financial institution at which the account is carried.
B. Any money or other assets payable to a participant in or beneficiary of, or any interest of any participant or beneficiary in, a retirement plan under section 401(a), 403(a), 403(b), 408, 408A or 409 or a deferred compensation plan under section 457 of the United States internal revenue code of 1986, as amended, whether the beneficiary’s interest arises by inheritance, designation, appointment or otherwise, is exempt from all claims of creditors of the beneficiary or participant. This subsection does not apply to any of the following:
2. Amounts contributed within one hundred twenty days before a debtor files for bankruptcy.
There is a distinction between acceptable exemption planning and dangerous manipulation of assets. As a result, it is very important that before engaging in any such planning that advice is sought out from competent bankruptcy counsel. Knowledge of the law for pre bankruptcy planning is one of those essential elements that a good bankruptcy lawyer brings to the table. Exemptions and pre bankruptcy planning are typically areas that bankruptcy debtors without lawyers end up making costly mistakes.
Bankruptcy planning often involves utilizing non-exempt (unprotected) assets prior to filing bankruptcy. This can involve spending non-exempt cash, contributing into retirement accounts such as an IRA, or many other forms of planning. It is important when bankruptcy planning not to push the envelope too far. Some planning can lead to problems.
A few examples that can lead to problems are things such as borrowing against non-exempt property to acquire exempt property, transfers of property made on the eve of bankruptcy, transfers to family, close friends or business partners, getting less value in return for the property transferred and retaining possession of property transferred. Dealing in those types of transactions can actually lead to a challenge to an exemption, an action to unwind the transfer, and can even result in a challenge to a debtor’s right to a discharge.
There are many traps for the unwary, so it is highly recommended to seek advice from an experienced bankruptcy attorney well in advance of filing for bankruptcy. This typically results in a large savings to the Debtor as well as a better chance for a successful bankruptcy case.