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  1. Bankruptcy Glossary
  2. Pre Bankruptcy Planning

What is Pre Bankruptcy Planning?

First the debtor must understand what pre-bankruptcy planning is not. It is not hiding assets or giving them to family members for "safe keeping". Any efforts to defraud creditors are illegal and activities prior to the bankruptcy will be scrutinized by the bankruptcy court. This includes excessive credit card spending prior to the bankruptcy filing. It is generally not a good idea to transfer any assets that can be transferred back to your estate after the bankruptcy case is completed.

The second major step in pre-bankruptcy planning for the debtor is to take inventory of their personal assets. Debts can be secured debt, which includes debt that is secured by collateral, and can be repossessed if a debtor defaults on their scheduled debt payments. If assets are worth less than the amount of debt owed the debtor may be responsible for the remaining debt payments. Debts can also be unsecured, which includes all debt such as personal loans and credit card debt, which are not secured by any type of collateral. Filing for Chapter 7 Bankruptcy will most likely liquidate most of an individual's non-exempt assets.

Talk to a bankruptcy lawyer about specific actions which should be taken prior to filing bankruptcy, but common legal actions can include:

  • Sell liquid assets to pay debts which will not be discharged by filing personal bankruptcy (taxes, student loans, alimony and/or child support).
  • Continue to make annual contributions to an IRA and other bankruptcy exemptions pension plans.
  • Make extra mortgage payments, especially if your state has a large homestead exemption.
  • Purchase a life insurance policy.

Bankruptcy attorneys can help a debtor determine what bankruptcy exemptions are allowed in their state and if it is a good idea to sell certain assets and use those funds to pay the debt payments on exempt property. It is important to educate yourself prior to filing personal bankruptcy (see debtor education).