What You Need To Know About Converting Non-Exempt Assets Into Exempt Ones

As part of the bankruptcy process, the trustee will sell your assets to pay your creditors. You can protect some assets by using exemptions allowed by the court, but these exemptions don't cover everything. One strategy you can use to increase the amount of money and property you can keep is to convert non-exempt assets into exempt ones. However, you must be careful when doing this; otherwise, you could be charged with bankruptcy fraud. Here's what you need to know about converting your assets.

What the Court Looks For

The bankruptcy court expects debtors to make full use of the exemptions available to them to protect their assets from seizure by the court. At the same time, the court doesn't want petitioners using the exemptions to commit acts of fraud either. Bankruptcy courts have long struggled with determining what is and isn't acceptable when it comes to converting non-exempt assets to exempt ones. However, there are four elements the court looks at when deciding whether a transaction is fraudulent:

  • The debtor had an interest in the property that was transferred
  • The transfer of property occurred within one year of filing bankruptcy
  • The debtor received less than the reasonable value for the property
  • The transfer caused the debtor to become insolvent

For example, you have a second vehicle worth $10,000. However, you already used the vehicle exemption amount to save your first car, so you decide to sell the second vehicle for $5,000 and use the case to purchase exempt property. You could get in trouble over this transaction, because you sold the vehicle at a significant loss.

Staying Out of Trouble

It's important to act reasonably when converting non-exempt assets to exempt ones. Always sell your possessions at a reasonable price. It's also a good idea to avoid selling items to friends and family members. One common way people hide assets is by pretending to sell the items to individuals they know with the expectation they would get the items back after their cases ends. Turning your assets over to someone in your close circle—especially at a reduced price—could give the transaction an air of deceit.

The other thing you want to do is carefully choose the exempt assets you buy. Some assets may send up red flags more than others. For instance, the court may not think anything about money used to buy necessities or pay rent but may question a purchase of thousands of dollars worth of work tools for a profession you don't work in.

Converting non-exempt assets into exempt ones can help you keep more of your money, but you must be careful when taking this action. It's best to consult with a bankruptcy attorney like Thomas A Blake for guidance in this area.