How to Protect Your Assets Before Filing Bankruptcy

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If you are considering bankruptcy, one of your biggest concerns may be what will happen to your home, car, savings, retirement accounts, and other property.

Can you protect your assets before filing bankruptcy?

In many cases, yes – but asset protection must be done carefully and legally.

Bankruptcy law provides exemptions that allow debtors to protect certain property from being used to pay creditors. The key is understanding which exemptions apply to your situation and planning appropriately before you file. In a Chapter 7 case, for example, the bankruptcy estate generally includes the debtor’s property, while applicable exemptions can protect certain assets from liquidation.

However, there is an important distinction between legally protecting assets and hiding assets. Transferring property to a relative, concealing money, selling property for less than it is worth, or otherwise attempting to keep assets away from creditors can create serious problems in a bankruptcy case.

What Does Asset Protection Mean in Bankruptcy?

Asset protection in bankruptcy generally means taking advantage of the exemptions and protections that bankruptcy law already provides.

Bankruptcy exemptions can protect certain types or amounts of property, depending on the applicable law. Examples can include:

Equity in a primary residence
Motor vehicles
Retirement accounts
Household goods and personal belongings
Tools and equipment necessary for your occupation
Certain insurance proceeds
Certain government benefits
Other property protected under applicable exemption laws

The exact protections depend on the circumstances of your case and the law that applies to you.

For Maryland residents, understanding the state’s exemption laws is especially important.

Maryland Has Its Own Bankruptcy Exemptions

Maryland has opted out of the federal bankruptcy exemption system. This means Maryland bankruptcy filers generally cannot simply choose the federal bankruptcy exemptions and instead must look to the exemptions available under Maryland law, subject to the applicable rules.

Maryland law provides protections for various types of property and funds.

For example, Maryland Courts currently explain that an individual may be able to exempt up to $6,000 in property for any reason, subject to the applicable law. Maryland also provides exemptions for certain funds based on their source, including certain Social Security benefits, veterans’ benefits, child support, public assistance, qualified retirement benefits, workers’ compensation, unemployment benefits, and alimony.

The available exemptions can make a significant difference in determining whether property is at risk in a bankruptcy case.

Know What Your Assets Are Worth

Before filing bankruptcy, it is important to understand the current value of your property—not simply what you originally paid for it.

For example, a vehicle purchased several years ago may have cost $30,000 when new but may be worth considerably less today.

The same applies to household furniture, electronics, jewelry, collectibles, and other personal property.

The value of an asset and the amount of debt secured by that asset are also important. If you own a home worth $400,000 but owe $375,000 on the mortgage, your equity is substantially different from someone who owns a $400,000 home free and clear.

Understanding your equity is therefore an important part of determining whether an asset is adequately protected.

Protecting Your Home

Your home may be your most valuable asset, so homeowners should carefully review their situation before filing bankruptcy.

The first step is determining your home’s current market value and subtracting mortgages, home-equity loans, and other valid liens to determine your approximate equity.

You can then compare that equity with the exemptions available under Maryland law.

If there is significant equity that may not be protected by available exemptions, the decision about whether and how to file bankruptcy can become more complicated.

That does not necessarily mean you cannot file bankruptcy. It means you should understand the potential consequences before submitting your petition.

Protecting Your Retirement Accounts

Retirement savings can be one of the most important assets to protect.

Certain qualified retirement accounts receive substantial protection under bankruptcy law. Depending on the type of account, this may include accounts such as:

401(k) plans
403(b) plans
Traditional IRAs
Roth IRAs
Certain pension plans

Retirement accounts should be evaluated carefully because the rules vary depending on the type of account and the circumstances involved.

If you are considering bankruptcy and have significant retirement savings, discuss those accounts with your bankruptcy attorney before making withdrawals, transfers, or other changes.

Be Careful with Your Bank Accounts

Money in a checking or savings account is an asset that must be disclosed in a bankruptcy case.

This does not mean that everyone who has money in the bank will lose it.

The important questions include how much money you have, where the money came from, and whether an exemption protects some or all of it.

Maryland law provides certain exemptions based on the source of funds, including protections that may apply to certain government benefits, retirement funds, child support, alimony, and other qualifying funds.

If you have recently received a large payment, inheritance, tax refund, bonus, settlement, or other significant amount of money, make sure your attorney knows about it before you file.

Using Cash for Necessary Expenses

If you have cash that may not be fully protected by an exemption, you may need to consider how that money will be used before filing.

There is an important difference between spending money on legitimate living expenses and attempting to make assets disappear.

Reasonable and necessary expenses can include things such as:

Mortgage or rent payments
Utilities
Groceries
Medical expenses
Necessary vehicle repairs
Insurance
Other ordinary household expenses
Reasonable bankruptcy-related legal fees

The reference article similarly emphasizes using non-exempt cash for legitimate necessary expenses rather than attempting to conceal assets.

However, this should not be interpreted as advice to spend down your assets simply because you intend to file bankruptcy. Large or unusual financial transactions should be discussed with your attorney first.

Do Not Give Assets to Family Members

One of the biggest mistakes someone can make before filing bankruptcy is transferring property to a family member or friend in an attempt to protect it.

For example, you should not:

Give your car to a relative
Transfer your home to someone else
Put your bank account in another person’s name
Give away valuable jewelry
Sell property to a friend for substantially less than its value
Move money to another person’s account
Hide assets from your bankruptcy attorney or trustee

Bankruptcy trustees can investigate financial transactions, and certain transfers may be challenged and potentially recovered for the benefit of creditors.

More importantly, attempting to conceal assets can put your entire bankruptcy case at risk.

The U.S. Trustee’s Bankruptcy Information Sheet specifically warns that a debtor’s discharge can be denied for dishonest conduct, including hiding property, falsifying records, or lying in connection with the bankruptcy case.

Don’t Sell Property for Less Than It’s Worth

Suppose you own a vehicle worth $20,000 and sell it to your brother for $5,000 shortly before filing bankruptcy.

Even if the transaction appears to be a legitimate sale, the significant difference between the sale price and the property’s actual value could raise questions.

Selling or transferring assets for less than fair value can create problems in a bankruptcy case.

If you genuinely need to sell an asset before filing, discuss the transaction with your attorney and document the circumstances appropriately.

Don’t Hide Assets

This may seem obvious, but it is worth emphasizing:

All assets must be disclosed.

An asset is not protected simply because you fail to tell the bankruptcy court about it.

Bankruptcy requires detailed schedules identifying your property, debts, income, and financial information. In Chapter 7, exemptions are claimed on the appropriate bankruptcy schedules.

Trying to leave an asset off your bankruptcy paperwork can create much more serious consequences than simply identifying the asset and determining whether an exemption protects it.

What About Gifts and Transfers Made Before Bankruptcy?

If you have recently transferred money or property to someone else, tell your bankruptcy attorney.

Do not assume that an old transfer is irrelevant or that a transfer to a family member cannot be discovered.

The timing, value, recipient, and purpose of the transaction can all matter.

Your attorney can determine whether a transaction creates an issue that needs to be addressed before filing.

Consider Your Bankruptcy Chapter

Asset protection can also be affected by the type of bankruptcy you file.

Chapter 7

Chapter 7 is sometimes called a liquidation bankruptcy because the trustee can liquidate nonexempt assets and distribute the proceeds according to bankruptcy law.

However, many Chapter 7 cases are “no-asset” cases, meaning there is no nonexempt property available for the trustee to liquidate.

The goal is therefore not necessarily to avoid owning assets. The goal is to understand which assets are exempt and how the applicable exemptions protect your property.

Chapter 13

Chapter 13 works differently because it generally involves a repayment plan rather than the same type of liquidation process used in Chapter 7.

For some people with significant assets or income, Chapter 13 may be an option worth considering.

Whether Chapter 7 or Chapter 13 is appropriate depends on your individual financial circumstances.

The Best Time to Discuss Asset Protection Is Before You File

One of the biggest mistakes people make is waiting until after filing to ask what will happen to their property.

Once a bankruptcy case is filed, the timing of certain transactions and the information included in your bankruptcy schedules become extremely important.

Speaking with a bankruptcy attorney beforehand allows you to identify potential problems and understand your options.

A good pre-filing review should look at:

Your home and available equity
Vehicles
Bank accounts
Retirement accounts
Investments
Business interests
Personal property
Life insurance
Recent financial transactions
Gifts or transfers
Potential inheritances
Tax refunds and other expected payments
Any other property in which you have a legal or equitable interest

The U.S. Bankruptcy Courts emphasize that determining which property is exempt can be a critical part of a bankruptcy case and that exemptions must be properly claimed.

Protecting Assets Does Not Mean Hiding Assets

There is a major difference between these two concepts.

Legal asset protection means using the exemptions and protections provided by bankruptcy law.

Illegal asset concealment means attempting to keep property away from creditors or the bankruptcy trustee through dishonest transfers, omissions, or other deceptive actions.

The first is an important part of bankruptcy planning.

The second can have serious consequences.

Your goal should be to enter bankruptcy with a complete understanding of your assets and the legal protections available—not to hide property.

The Bottom Line

If you are considering bankruptcy, don’t assume that filing means you will lose everything you own.

Bankruptcy law provides exemptions that can allow you to protect certain property. Maryland has its own exemption system, and understanding those exemptions before filing can be an important part of your bankruptcy strategy.

At the same time, trying to hide assets, transfer property to friends or relatives, or sell property for less than its value can create serious legal problems.

The best approach is to be proactive.

The Law Offices of Adam M. Freiman, P.C. can review your assets, explain the exemptions that may apply to your situation, and help you understand your options before you file.

If you’re considering bankruptcy, talk to an experienced bankruptcy attorney before moving, selling, transferring, or giving away significant assets. A little planning before filing can help you avoid costly mistakes and make the most of the legal protections available to you.

This article is intended for general informational purposes only and does not constitute legal advice. Bankruptcy exemptions, asset transfers, and other bankruptcy rules are fact-specific and can be complex. Consult a qualified bankruptcy attorney about your individual circumstances.