Pre Bankruptcy Planning Law and Legal Definition

Pre-bankruptcy planning refers to taking steps to protect assets prior to filing for bankruptcy.

It involves an arrangement or rearrangement of a debtor's property to allow the debtor to take maximum advantage of the exemptions provided by the Bankruptcy code. The primary way to legally protect assets is to convert assets that are not exempt into exempt assets. This practice is not in and of itself illegal or improper. The federal Bankruptcy laws and most state laws allow for the conversion of nonexempt assets to exempt assets. This is not considered fraudulent but merely an allowance for debtors to take full advantage of existing exemption guidelines. The legislation allows for this conversion even if it is done in contemplation of filing for bankruptcy and/or with the intention of placing assets beyond the reach of creditors.

As such there are no tests for determining how much pre-bankruptcy planning is allowed or acceptable. Generally the criteria considered are: amount transferred to exempt property; proximity to the bankruptcy filing; whether the conversion to exempt property involves new funds or previously secured property; whether the conversion benefits insiders of the debtor and whether the debtors mislead creditors during the conversion.

The courts can impose penalties if there is improper pre bankruptcy planning.