California state law allows debtors to protect certain assets from the reach of creditors. These laws have their origins in England. The first English exemption law protected only the debtor’s clothes, bedding and tools of the trade. Today, debtors can protect much more by applying the proper state exemption laws.
California exemptions only apply to individual debtors, not corporations, partnerships or limited liability companies. Individuals have to claim the exemptions. These are not automatic. Any property that the debtor has that could have been exempt but is not listed properly in the bankruptcy petition documents, the debtor will probably lose to the bankruptcy estate, subject to the distribution to creditors.
Under California law, there are two sets of exemptions. The debtor may claim either set of exemptions in bankruptcy. Which one the debtor chooses depends on the types of assets the debtor has and the value of those assets. However, the debtor cannot mix and match exemptions. The debtor must choose one set or the other.
Before filing for bankruptcy, a debtor may engage in what is commonly referred to as “pre-bankruptcy exemption planning.” This is a strategy employed by a debtor to convert non-exempt assets into exempt assets. However, in doing so, the debtor must be careful not to run afoul of the fraudulent transfer laws. If the court finds that the debtor transferred assets with the intent to hinder, defraud, or delay creditors, it will impose sanctions against the debtor.
The question of whether a debtor acted with the intent to defraud a creditor is determined by the courts on a case-by-case basis. In doing so, the courts will look at a number of factors including but not limited to: (1) lack of consideration-whether the debtor actually received payment for what he transferred; (2) lack of disclosure of the transfer to creditors and to the trustee; (3) misleading or untruthful statements to creditors (4) high value of the assets transferred; (5) whether the transfer benefited the debtors relatives, business associates or other insiders; (6) the timing of the transfer; (7) the financial condition of the debtor at the time of the transfer and other factors.
If not properly executed, a “pre-bankruptcy exemption planning” can result in the court finding that the debtor transfered assets with the intent to defraud creditors and will impose sanctions against the bankruptcy debtor. These sanctions can include: (1) avoidance of the improper transfer; (2) denial of the discharge; (3) denial of an exemption and (4) criminal prosecution in some cases.
Two types of transfers that courts routinely find have been committed with the intent to defraud are ones that involve debts incurred by the debtor on the eve of filing bankruptcy and where the debtor has failed to disclose, in the bankruptcy petition, transfers made before filing.
For more information, please contact The Law Offices of Susana B. Tolchard and Associates at 661-287-9986.
