We discussed how to protect assets in bankruptcy cases in an earlier post. Just a few days later, we have another case that shows another way to do it. The previous case involved cashing out an whole life insurance policy that would not have been protected in the bankruptcy and then putting the cash into an exempt IRA. Well, we have a another fresh case out of North Carolina where the Court allowed the same type of exemption planning and asset protection. This is another way that can provide information on how to protect assets in bankruptcy.
In the Crampton v. Koehler case, out of the Northern District of North Carolina, the Debtors had sold $14,000 worth of household furnishing an auction. These personal items would not have been exempt and protected in the bankruptcy. They would not have been able to protect them from seizure by their bankruptcy trustee. They used $12,000 of the proceeds from the sale and funded two Roth IRAs right before filing the Chapter 7 bankruiptcy. As in the earlier case, the Trustee filed suit to avoid the transfer of that money under the 548 fraud section of the bankruptcy code.
But not so fast Mr. Trustee. The North Carolina bankruptcy court has a powerful 4th Cir. case from the 80’s titled Ford V. Poston, 773 F.2d 52 (4th Cir. 1985). The general rule in the 4th Circuit is that “mere conversion of property from non-exempt to exempt on the even of bankruptcy, even though the purpose is to shield the asset from creditors, is not enough to show fraud.” Ford at 54. (As we discussed in our previous post, this language is also used in the 5th Circuit)
The bottom line is that something more than the act of conversion itself is needed. There must be a demonstrated intent to defraud creditors. A Debtor in bankruptcy is allowed to make full use of his exemptions when trying to protect assets in bankruptcy. So is possible to set up a fence to shield and protect those assets.
It has to be done right however. Take caution because, as we discussed in the prior post, there is a point where you go from pigs getting fat to hogs getting slaughtered. That’s why it is very important that you have an experienced bankruptcy attorney to help you navigate through the bankruptcy laws and rules. You do not want to file bankruptcy by yourself.
If you need to protect assets in bankruptcy, this is not a road you want to travel alone. You need the assistance and advice of experienced bankruptcy counsel to walk through the consequences of your decisions to save assets in bankruptcy.
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We provide bankruptcy services in the greater Houston metro area including the cities of Katy, Sugarland, Pearland, Friendswood, Clear Lake and Galveston. We also handle cases from The Woodlands, Spring and Tomball and cases in Baytown and Channelview.
We handle bankruptcy cases in all of these counties: Brazoria, Chambers, Galveston, Matagorda, Austin, Brazos, Colorado, Fayette, Fort Bend, Grimes, Harris, Madison, Montgomery, San Jacinto, Walker, Waller, Wharton