Pre-bankruptcy planning is the transferring of non-exempt assets into exempt assets. Exempt assets are normally those protected from seizure by unsecured creditors. Transferring non-exempt into exempt assets is a practice is not in and of itself illegal or improper. The Bankruptcy Code legislative notes specifically permit this type of activity. But, this is not to say that the procedure is without risk. The 2005 changes in the bankruptcy laws challenge the constitutional right of every person to receive adequate legal advice from their attorney regarding pre-bankruptcy transfers or incurring new debt.
In some situations, courts found the pre-bankruptcy planning to be so egregious that it justified the debtor losing his or her discharge and/or sanctioning of the debtor’s attorney. Under the prior law this result was rare, being deprived of a discharge defeats the entire reason behind bankruptcy and is disastrous for the debtor. Given the uncertainty in this area it would be advisable for debtors and their counsel to tread very carefully. The new law is so confusing that no one, judges includes, really understand how to deal with issues. My recommendation: do not be the first one to try aggressive pre-bankruptcy planning.
To lawyers: you need to make a decision whether your constitutional right and ethical duty to give your clients competent advice, is controlled by this poorly drafted attempt of the credit card industry to scare everyone, lawyers included, away from bankruptcy protection.