Good Reason to Delay Bankruptcy until Now: Deleting Non-Exempt Assets
Bankruptcy focuses (for most purposes) on your assets as of the moment of filing. So consider using up unprotected assets before then.
If you have any assets which are not protected through the applicable property exemptions, one strategy is to use up such assets for your reasonable cash-flow needs before your bankruptcy case is filed.
This can be done by simply spending the money if it is in cash or cash-convertible form, such as a savings, money market, or brokerage account, or any other kind of fund that is not exempt. Or if not in cash-convertible form, the equity in the asset can be tapped through a legally enforceable secured loan, with the loan proceeds spent for living expenses.
Spending Down Assets in Different Situations
When you are spending down assets that you would otherwise potentially lose to your creditors, you may do so for various reasons:
- You have decided, through advice from a lawyer, that you need to file bankruptcy and are spending down unprotected assets because doing so give you a better fresh financial start, and you see no benefit to giving these assets to your creditors.
- You need to file bankruptcy but for certain tactical reasons you need to delay filing (such as to be able to write off more income taxes or to qualify for “cramming down” your vehicle loan) and you need to live off your non-exempt assets in the meantime.
- You are not certain that you need to file bankruptcy—such as you may not need to if you get a job that you’re hoping for—but in the meantime it makes sense to deplete unprotected assets in case you do end up filing bankruptcy.
Spending Down Cash
Although the bankruptcy system focuses on what you own as of the moment your bankruptcy is filed, it CAN under some circumstances look back at what happened to your assets before your filing date. So it is important to spend non-exempt funds in a prudent and reasonable manner. And to get very specific legal advice appropriate to your unique circumstances from an experienced bankruptcy lawyer.
Regardless, spending your money on a wild vacation a few weeks or months before filing would obviously not look good. Besides, usually you have plenty of better uses for your precious money.
Spending down unprotected funds often works in conjunction with protecting funds that you would otherwise be using for living expenses, such as your income from employment. (See our next blog post for more about protecting such income.)
Tapping the Equity in Your Vehicle(s)
Even if you don’t own much else, you may own your vehicle free and clear. If so, it may be worth more than its applicable exemption. This may also be the situation if it’s not free and clear but you are getting close to paying it off, and its amount of equity exceeds the exemption amount. In either case it may make sense to take a loan out on the vehicle to eat up the unprotected value or equity.
At first taking out a loan on your vehicle may sound odd for a number of reasons:
- Isn’t there something wrong with taking out a loan when you are about to file bankruptcy?
- Who is going to give you a loan when your credit is not good?
- Does taking out a loan on a vehicle really protect it from other creditors?
To clarify, this loan would not be written off in your bankruptcy case. After all it is secured by your vehicle, which you presumably want to keep. To keep the vehicle, you’d have to agree to continue paying off the loan. There is nothing wrong with incurring a debt before filing bankruptcy that you have every intention of paying. That’s especially true if the debt is secured by your vehicle, which the creditor would be able to take from you if you failed to pay the debt.
Under rare circumstances you might be able to qualify for such a secured loan from a commercial source—if the vehicle is worth much more than the loan and if your credit record is still relatively good. But usually such a loan would have to be provided by a relative or close friend who has the money and the willingness to make the loan. He or she would usually know about your intent to file bankruptcy and your need to protect your vehicle in this way.
This method to protect your vehicle DOES work because the new secured creditor has an interest in your vehicle superior to your other creditors. The new creditor’s debt reduces your interest in the vehicle by the amount of the debt, leaving your interest worth less than the exemption amount. This means that your interest in the vehicle would be completely protected by the exemption, fulfilling the purpose for the loan.
The last words on arranging such an equity-eating pre-bankruptcy loan:
1) the loan terms must be commercially reasonable—an appropriate rate of interest and sensible monthly payments;
2) the creditor must precisely follow the steps for recording a lien on the vehicle, getting thorough legal advice to ensure this happens; and
3) the loan must be legitimate—with the funds actually delivered, and a record kept of how it is spent before the case is filed.
These kinds of secured loans can also be taken out on other non-exempt or not fully exempt assets that you need to protect besides your vehicle, using the same principles.