When it’s time for bankruptcy planning, my clients in LA, Ventura and Santa Barbara counties often go “Huh?”

It’s not obvious that filing bankruptcy should involve timing and strategy. But a good bankruptcy does. Why? To minimize assets the Bankruptcy Trustee may take. Here’s why pre-bankruptcy filing planning matters.

Chapter 7 Bankruptcy Planning in Los Angeles County – What You Need to Know

Bankruptcy Planning Avoids Asset Seizure by the Bankruptcy Trustee 

The Bankruptcy Trustee is a quasi-judge appointed to administer every Chapter 7 Bankruptcy in California. When a bankruptcy petition is filed, legal ownership of all the debtor’s debts and assets is transferred to a Trustee, until the bankruptcy is completed. The Trustee can use any assets in excess of what the debtor is legally allowed to keep through bankruptcy to satisfy the debtor’s debts. Ideally, a debtor will have nothing more than what they are allowed to keep. That’s where the pre-filing planning comes in: to get as close to having nothing for the Trustee to use to pay off debts on the day the bankruptcy is filed (and legal ownership of the debtor’s assets and debts is transferred to the Trustee). Whatever debts the Trustee cannot pay with the debtor’s assets are “discharged” or wiped out. That’s the agreement a debtor makes when filing bankruptcy: giving up control of their assets and debts in exchange for having the debts that qualify for discharge being wiped clean.

Bankruptcy planning is key because a debtor doesn’t want the Trustee to take assets when s/he has legal ownership of the debtor’s estate.

Pre-bankruptcy planning shifts or spends those assets so that the Trustee cannot claw them back when the bankruptcy petition is filed. 

Assets Debtors Always Keep Through Bankruptcy

In addition to one of the above-two exemptions, debtors are always allowed to take two things through bankruptcy. First, since most Californians need a car to get to work, the bankruptcy laws allow a debtor to keep about $5,000 in the resale value of each car. In other words, you can keep an older car entirely but if you have a newer Tesla, that’s vulnerable because it’s worth so much (unless its value is claimed under the Wildcard exemption).  Second, debtors keep all of the money in their 401k/403b retirement accounts and up to $1.3 million in their IRAs. The government doesn’t want to support debtors, they get to keep this money. Additionally, debtors can get away with keeping hard-to-sell assets worth less than about $5,000. Since it takes take and effort to sell some kinds of assets, Trustees often ignore hard-to-sell assets of relatively little value, such as a 20-year RV, a debtor’s household goods and furnishings, or Aunt Hazel’s collection of Hummel figurines. 

Cash & Liquid Deposits (Like Stock) Are Vulnerable in Bankruptcy

The purpose of pre-bankruptcy filing is to protect any assets vulnerable to taking by the Trustee that don’t fall under either the Wildcard or Homestead exemption, or that aren’t an older car or retirement account. For example, if a debtor has several thousand dollars sitting in a stock fund or a checking account on the date of filing, that money not only can be taken by the Trustee but s/he actually has a legal obligation to to pay off as many of the debtor’s debts as possible with any non-exempted assets. 

What Should a Debtor Do if They Have $5,000 In a Checking Account?

Bankruptcy timing is critical, especially if you have more than about $2,000 in relatively liquid assets, such as money in a checking, savings or stock account, or an easy-to-sell asset such as a motorcycle or newer RV. Debtors want to spend down as much of the assets vulnerable to taking by the Trustee as possible. However, they are also very restricted by bankruptcy laws in how they may spend that money, or get rid of an asset. For example, the Trustee can claw back most gifts and sales made by the debtor in the three years before filing for bankruptcy, so giving the money in a checking account to a relative or selling the RV doesn’t work. (However, it does work to do this, if the debtor is willing to wait three years to file bankruptcy – at the cost of putting up with creditor calls or the cost of hiring someone to intercept and take those calls, like me). So, how can a debtor avoid having the Trustee take liquid assets not covered by exemptions?

Pre-Paying Basic Living Expenses is the best way to spend down money in checking or savings accounts, an asset that a Trustee can easily take to pay creditors. While a Trustee can legally claw back payments made by the debtor to any creditor in the 3 months prior to bankruptcy filing, s/he is unlikely to take away a debtor’s ability to live. Thus making a few future car payments, rent/mortgage payments, health insurance premiums, or daycare payments allows the debtor to use their assets/account balances in ways that the Trustee will not challenge. A good bankruptcy attorney should always counsel clients on the timing of their bankruptcy filing to minimize the money sitting in deposit accounts. 

Investing in Retirement Accounts is another good way to spend money in deposit accounts that the Trustee cannot claw back. Since debtors are allowed to take all the money in 401k retirement accounts and up to $1.3 million is IRAs, putting an excess cash into retirement savings means you get to keep that money through bankruptcy. Of course, the downside is that you no longer have quick or costless access to it. 

Modest Investments in 529 Accounts are exempt if made more than a year before the bankruptcy case is filed, and then only in the amount is about $6,500 or less. You can invest as much as you want in a 529 without the Trustee clawing it back, if you wait two or more years to file bankruptcy. 

Waiting to File Bankruptcy is good strategy for some debtors. Many taxes can be discharged after they are three years old (though payroll taxes can never be discharged in bankruptcy). And, in general, a Trustee can only claw back transfers of property and money that occurred less than four years before a bankruptcy is filed. It thus can make sense to sell or gift an unaffordable boat, then put up with hassling calls from creditors for a few years before filing. However, since every debtor’s asset portfolio is different, it’s important that their bankruptcy attorney plan carefully how to get through bankruptcy with as many of their assets as possible.

In Los Angeles County or in Californa? Contact me Me If You’re Considering Bankruptcy and Need Guidance on Bankruptcy Planning & Timing; All Good Bankruptcy Attorneys Will Offer This.

Call For Consultation: (818) 889-8080 or Contact us online today.

January 27, 2023

    Name (required)

    Email (required)


    Brief Description of Legal Issue: (required)

    The use of the Internet or this form for communication with the firm or any individual member of the firm does not establish an attorney-client relationship. Confidential or time-sensitive information should not be sent through this form.