Filing bankruptcy is not something that anyone would call convenient. In fact, most people who file or are considering filing are doing so because their lives have become complicated by a variety of circumstances and decisions surrounding their finances. Oftentimes, when a client comes to see me, debt collectors are calling night and day, threatening to call their boss or family. They are tired of worrying about what is going to happen to them and their family. They want to file right away.

It is just this moment, after I listen to them tell me why they want to file bankruptcy, that I explain to them the bankruptcy process. It is important that I have a complete understanding of their financial situation before I file their bankruptcy petition. Then I start firing questions at them until they feel like they’re being interrogated. I ask them about their credit cards, mortgage, and bank accounts. I ask them what bills they’ve paid to creditors in the last 90 days. I ask them all the questions that they’ve been told it wasn’t polite to ask.

One of the questions I’m going to ask is how much cash they have, whether or not it’s in a bank account or hidden under their mattress. This is a crucial question, because if they have too much cash on hand when they file their petition, the bankruptcy trustee might try to get her hands on it.

If I discover that they have a lot of cash, that’s when we go into “pre-filing planning” mode. You might be wondering why someone with extra cash is planning on filing bankruptcy. One example might be someone who was giving a large severance payment right before being laid off, or, as in the case below, they just got a tax return.

Depending on your circumstances, it might be wise to take some money and put it into what is called an “exempt” asset. An exempt asset is one that is protected by the bankruptcy rules from being sold to pay your creditors.

Sound fishy? Transferring property before you file bankruptcy can certainly land you in hot water, but there isn’t a simple black or white answer.

Judge Elizabeth Brown of the District of Colorado Bankruptcy Court addressed this issue recently in a decision she wrote in In Re. Beaudin. In that matter, the debtor, Beaudin, hours before he filed his bankruptcy petition, took his tax refund and opened an individual retirement account (an “IRA”) with it.

Judge Brown’s concise analysis of Beaudin’s actions hinged on whether or not his actions were fraudulent. The decision refers to the “badges of fraud” that have been developed in connection with fraudulent transfer. Among the questions that must be asked to determine if a fraudulent transfer has taken place are: 1) whether the conversion was disclosed or conceal; 2) whether the debtor was being sued or threatened with suit when the conversion was made; 3) whether the conversion was of substantially all of the debtor’s assets; 4) whether the debtor absconded; 5) whether the debtor removed or concealed assets; 6) whether the debtor was insolvent or became insolvent shortly after the conversion; 7) whether the conversion occurred shortly before or after a substantial debt was incurred; and 8) whether the debtor retained control of the property which was transferred.

Judge Brown goes on to list several other “badges of fraud” and empathizes with bankruptcy attorneys who struggle with how to counsel clients. In the end, however, she decided that Beaudin’s actions were not fraudulent. In doing so, she notes that Beaudin completely disclosed the timing and the source of funds he used to fund the IRA. She also notes that if Beaudin had waited to file, his bankruptcy estate would gotten none of his tax return and instead paid $1,100 in his bankruptcy estate. While Judge Brown’s decision doesn’t establish a black and white line as to what is proper pre-filing planning, but she is clear that maximizing exempt property is proper.

As Beaudin shows, filing bankruptcy requires more than an ability to prepare paperwork. If you are considering bankruptcy, talk to a bankruptcy attorney before you file. But even if you don’t hire an attorney, remember that if Beaudin had not disclosed the IRA in his petition he would have had a much more serious problem on his hands than collectors hounding him: he would have gotten a visit from the FBI.

Author Bio: Peter Mullison is a Denver, Colorado attorney who practices at Colorado Bankruptcy Law Group, LLC. You can read more about bankruptcy at http://coloradobankruptcyguide.com.

Category: Legal
Keywords: Denver, Colorado, Bankruptcy, Attorney, Chapter 7, Chapter 13, Lawyer, Foreclosure, Debt, Collection