Pre-Bankruptcy Planning - ABA YLD 101 Practice Series


By Jeana Kim Reinbold

  1. Exemptions and Pre-Bankruptcy Planning

    Exemption laws allow individuals to protect certain assets from creditor process.   The Bankruptcy Code permits debtors to exempt property from distribution to creditors pursuant to state law. 1  The Code generally respects property exemptions as they are defined by state law and vary widely from state to state. 2  Section 522(b)(2) also provides that federal exemptions are available unless states have specifically “opted out” of the federal exemption scheme. 3 

    Pre-bankruptcy planning is typically defined as the arrangement (or rearrangement) of a debtor's property to allow the debtor to take maximum advantage of allowable exemptions prior to the filing of a bankruptcy case. 4  Common examples of this include the sale of nonexempt property in order to acquire exempt personal property or to make payments to pay down mortgages securing exempt homes. 5

    The Code does not expressly prohibit such planning in advance of bankruptcy; in fact, the legislative history to the Code specifically provided that a debtor’s conversion of nonexempt property to exempt property before filing would not be fraudulent per se as to creditors. 6  Courts have adhered to the general principle that the conversion of non-exempt property to exempt property, even if for the purpose of placing the property out of reach of creditors, without more, will not deprive the debtor of an exemption to which he would otherwise be entitled. 7 

    However, courts have recognized that pre-bankruptcy planning can go too far when beyond the mere desire to convert assets into exempt forms, other factors evidencing fraud are present. 8  Courts have struggled to define this line which separates ordinary pre-bankruptcy planning from fraudulent action. 9  As memorably phrased by one court regarding this murky jurisprudence:  “There is a principle of too much; phrased colloquially, when a pig becomes a hog it is slaughtered.” 10 

  2. Challenges to Pre-Bankruptcy Transfers

    In attacking pre-bankruptcy planning, under the Code, creditors prior to the 2005 amendments to the Code had been limited to primarily two tools.  First, under Section 727(a)(2)(A), a creditor could object to the discharge of a debtor who made certain transfers of property within one year of the bankruptcy filing. 11  Alternatively, a creditor could seek to set aside a debtor’s pre-filing transfer of property as fraudulent under the Code’s fraudulent transfer provision in Section 548(a)(1). 12 

    A transfer is avoidable on the basis of actual fraud if the transfer is made with the actual intent to “hinder, delay or defraud.”  Because it is often impractical on direct evidence to demonstrate an actual intent to hinder, delay or defraud creditors, courts in considering the circumstances of the transfer have taken note of certain recognized criteria or “badges of fraud” as set forth in the Uniform Fraudulent Transfer Act to infer fraudulent intent – certain objective facts a creditor may use to raise a rebuttable presumption of actual fraudulent intent. 13 

    Some of the more common circumstantial indicia of fraudulent intent include:
    1. actual or threatened litigation against the debtor;
    2. a purported transfer of all or substantially all of the debtor’s property;
    3. insolvency or other unmanageable indebtedness on the part of the debtor;
    4. a special relationship between the debtor and transferee;
    5. retention by the debtor the property involved in the putative transfer.  

      The presence of a single badge of fraud may spur mere suspicion; but the confluence of several can constitute conclusive evidence of an actual intent to defraud, absent significantly clear evidence of a legitimate supervening purpose. 14 

      Before the amendments to the bankruptcy law by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, stories of debtors allegedly abusing the bankruptcy laws were well-publicized by the media. 15  According to the media, particularly egregious stories of abuse included those of debtors who could afford to pay their debts moving to states such as Florida to take advantage of such a state’s more generous exemption scheme. 16  The changes added by BAPCPA sought to address some of these perceived abuses, including:
      • Section 522(o) – reduces value of homestead exemption by amount attributable to fraudulent transfers within 10 years of the bankruptcy filing; 17
      • Section 522(p) – limits homestead exemption to $136,875 for property acquired within 1,215 days of filing (with an exception for debtors who move within the state); 18
      • Section 522(q) – limits homestead exemption to $136,875 for those who commit securities fraud or owe debts arising from acts resulting in death or serious physical injury (with an exception for amount of interest in the property that is reasonably necessary for the support of the debtor and any dependent of the debtor); 19
      • 548(e)(1) – trustee may avoid a transfer of non-exempt assets to self-settled trust within 10 years of filing; 20
      • 522(b)(3)(A) – time debtor must live in a state to take advantage of its exemptions increased from 180 days to 730 days. 21

        Courts have continued to look to the pre-BAPCPA caselaw applying fraudulent transfer analysis to pre-bankruptcy planning post-BAPCPA.  For instance, BAPCPA added Section 522(o), which provides for the reduction of a debtor’s homestead exemption to the extent that its value is attributable to transfers within 10 years before the bankruptcy case with the “intent to hinder, delay or defraud.” 22  Based upon this similar statutory language, bankruptcy courts have looked to the caselaw construing Section 548(a)(1) and Section 727(a)(2) to determine the meaning of the similar language contained within this statutory provision. 23

        As a result, although BAPCPA introduced some new tools for limiting exemptions, BAPCPA largely left in place the former jurisprudence regarding determining when a “pig” becomes a “hog,” and the guidance offered by those decisions.  Careful evaluation of circumstances the bankruptcy court may deem as extrinsic evidence of fraud therefore remains important in advising debtors pre-bankruptcy – and may be critical to a debtor’s ability to keep exempted property and a discharge. 

1 11 U.S.C. § 522(b)(2); Panuska v. Johnson (In re Johnson), 880 F.2d 78, 79 (8th Cir. 1989).  This article refers to the Bankruptcy Code of 1978 generally as the “Code.”
2 See Butner v. United States, 440 U.S. 48, 52 (1978).
3 Of the First Circuit states, federal exemptions are available in Massachusetts, New Hampshire and Rhode Island, while Maine is an opt out state.
4 See United States Courts, Glossary,
5 See, e.g., Johnson, 880 F.2d at 80; Hanson v. First National Bank in Brookings (In re Hanson), 848 F.2d 866, 867-68 (8th Cir. (S.D.) 1988); Norwest Bank v. Tveten (In re Tveten), 848. F.2d 871, 872-73 (8th Cir. (Minn.) 1988); In re Maronde, 332 B.R. 593, 595-97 (Bankr. D. Minn. 2005).
6 H.R. Rep. No. 95-595, 361 (1977), as reprinted in 1978 U.S.C.C.A.N. 5963, 6317; S. Rep. No. 95-989, at 76 (1978), as reprinted in 1978 U.S.C.C.A.N. 5787, 5862.
7 See, e.g., Johnson, 880 F.2d at 82 (“We read Tveten and Hanson to reaffirm the rule that conduct sufficient to defeat discharge requires indicia of fraud beyond mere use of the exemptions.”)
8 Id. at 81 (citing Hanson, 848 F.2d at 868; Tveten, 848 F.2d at 873-74).
9   Johnson, 880 F.2d at 81.
10 Albuquerque National Bank v. Zouhar (In re Zouhar), 10 B.R. 154, 157 (Bankr. D.N.M. 1981).
11 11 U.S.C. § 727(a)(2)(A).
12 11 U.S.C. § 548(a)(1).
13 BFP v. Resolution Trust Corp., 511 U.S. 531, 540-41 (1994); Max Sugarman Funeral Home, Inc. v. A.D.B. Investors, 926 F.2d 1248, 1254 (1st Cir. (R.I.) 1991).
14 Max Sugarman Funeral Home, 926 F.2d at 1254 (emphasis in original; citations omitted).
15 Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. No. 109-8, 119 Stat. 23 (as codified in 11 U.S.C.) (“BAPCPA”).
16 See, e.g., In re Coplan, 156 B.R. 88 (Bankr. M.D. Fla. 1993); Havoco of America, Ltd. v. Hill, 790 S.2d 1018 (Fla. 2001).
17 11 U.S.C. § 522(o).
18 11 U.S.C. § 522(p).
19 11 U.S.C. § 522(q).
20 11 U.S.C. § 548(e)(1).
21 11 U.S.C. §§ 522(b)(3)(A).
22 11 U.S.C. § 522(o).
23 See, e.g., Addison v. Seaver (In re Addison), 540 F.3d 805, 811 (8th Cir. 2008) (“Due to the similar wording of those statutes, numerous bankruptcy courts have looked to the body of caselaw construing ss 548(a)(1) and 727(a)(2) to determine the meaning of "with intent to hinder, delay, or defraud a creditor" in § 522(o).   See In re Maronde, 332 B.R. 593, 599 (Bankr. D. Minn. 2005) ("It is only logical to assume that Congress intended that by using essentially the same phrase in § 522(o), cases construing the fraudulent conveyance and discharge provisions also would apply to add body to the bare words of this new Congressional language"); In re Fehmel, No. 07-60831, 2008 WL 2151797, at *7 (Bankr.W.D.Tex. May 22, 2008) ("The phrase 'with the intent to hinder, delay or defraud a creditor' contained in § 522(o) is ... not defined in the Bankruptcy Code.... Therefore, in interpreting the meaning of the phrase as contained in § 522(o), it is appropriate to look to caselaw interpreting [§ 727(a)(2) and § 548(a)(1)(A)]"); In re Agnew, 355 B.R. 276, 284 (Bankr.D.Kan.2006) (construing the meaning of "intent to hinder, delay, or defraud a creditor" in § 522(o) from cases construing the meaning of intent to hinder, delay, or defraud in §§ 722(a)(2) and 548(a)(1)); In re Lacounte, 342 B.R. 809, 814 Bankr.D.Mont.2005) (same); In re Sissom, 366 B.R. 677, 691-92 (Bankr.S.D.Tex.2007) (same).”)


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About the Author

Jeana Kim Reinbold ( is a senior attorney and the chair of the bankruptcy department at Ablitt Scofield, P.C. in Woburn, MA.  Her current practice focuses on the representation of national and regional secured creditors in bankruptcy cases, loan workouts and modifications, real estate conveyancing and related litigation.

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