One common tactic of debtors to protect their assets and properties is by “hiding” them elsewhere – usually by transferring them to their relatives or to their most trusted friend. However, this is outright fraud. If your trustee, creditors or the court caught you doing the act, you will suffer penalties – nullification of questionable transfers, disqualification of debt discharge, and you could even be criminally prosecuted for doing such.
But, do you know that there’s another way to protect your assets and properties? It’s by converting non-exempt assets into exempt assets before you file for bankruptcy. This isn’t an easy process, though, but it’s better than hiding your assets – at least, you’re not risking criminal prosecution and other penalties.
Non-Exempt Assets vs. Exempt Assets
In bankruptcy, non-exempt assets are simply assets that are not exempt from possibly being taken away from you for liquidation and payment purposes. In short, these are the assets you could lose – keep in mind the word “could”, because you won’t lose them right away. There are processes before they take those assets from you, depending on which Chapter you filed.
Exempt assets are assets which you securely belong. Nobody won’t take those assets from you during your bankruptcy case. The definitions are very simple, but it’s important to know which exactly are your non-exempt and exempt assets. Here are some examples.
- Any property that’s not your primary home
- Newer or latest car with equity
- Your primary home
- Car or vehicle you regularly use and/or with less equity
- Basic clothing
- Tools of your trade (items you need for your business or profession)
Basically, the difference between non-exempt assets and exempt assets is this: exempt assets are assets you need to meet a basic standard of living (whatever you need for a household or job or any source of income). Non-exempt assets are the “excess” – you don’t necessarily need them to meet your basic standard of living. This explains why your primary home is an exempt asset and any property that’s not your primary home is considered a non-exempt asset.
Can You Convert Your Non-Exempt Assets to Exempt Assets?
Now that you know the basic difference between non-exempt and exempt assets, it’s time to know if you can convert your non-exempt assets into exempt assets.
Do not get your hopes high: the process is not easy, as mentioned already earlier, but definitely worth it than hiding them during your bankruptcy case.
So, can you convert your non-exempt assets into exempt assets?
It is possible through exemption planning. Before filing for bankruptcy, you can reorganize your finances, assets and properties in a way that you maximize how much assets and properties you can keep. This is where you can convert your non-exempt assets into exempt assets. One way to convert non-exempt assets into exempt assets is by selling your non-exempt asset (based on the going market rate) to buy one an exempt asset. For example, you can sell your second house (for the going market rate) to buy a car that’s necessary for your job and other daily needs. In that way, you keep the value for yourself. But, if you already own 10 cars, this transaction is probably not good. But that’s the idea.
Keep in mind that how much can you exempt depends on your state’s law. Also, excessive exemption planning could be deemed as bankruptcy fraud – much like, more or less, the tactic of hiding your assets.
When you do some exemption planning, be sure the amount of what you exempt are reasonable and not excessive. Excessive exemptions are deemed as if you are practically keeping those assets away from your trustee and creditors.
Seek Legal Advice
Determining which of your assets are non-exempt or exempt could be a little tricky. A same exact car could be an exempt asset to one person and non-exempt asset to another. If that car is the only car you have – and you use it for your daily needs – then that car is deemed as your exempt asset. However, if that same car is your 8th car of your collection of, say, 10 cars, most likely, that would be deemed non-exempt.
However, there are still other factors that makes one asset exempt or non-exempt relative to your situation. Hence, when you do your exemption planning, it’s best you seek legal advice.