When Does Bankruptcy Planning Become A Scheme To Defraud
People considering filing bankruptcy need to know what they are allowed to purchase before filing bankruptcy. For example, the debtor might receive a large tax refund just before filing. If the debtor buys an AR-15 and 1,000 rounds of ammunition, will the trustee allow that? In Wyoming, bankruptcy debtors are allowed to keep up to three firearms worth up to $3,000 and 1,000 rounds of ammo for each, so the AR-15 and shells would normally be an exempt asset that the debtor gets to keep. On the other hand, if the debtor’s sole purpose in acquiring the firearm is to hinder, delay or defraud creditors, not only does the debtor lose the AR-15, the debtor’s discharge of all debts can be denied or revoked.
As a result, “bankruptcy lawyers can face a dilemma in advising clients whether to acquire exempt assets . . . ‘[T]he same conduct can be malpractice not to advise in one jurisdiction, but voidable and grounds for denial of discharge and possibly for disbarment in another . . . .’” OTE Dev. USA, Inc. v. Warren, 512 F.3d 1241, 1249, (10th Cir. Utah 2008).
To deny or revoke a debtor’s discharge, the bankruptcy trustee would have to show three things: (1) in the year prior to the bankruptcy filing; (2) the debtor transferred, removed, destroyed, or concealed his property; and (3) that the debtor acted with the “intent to hinder, delay, or defraud creditors.”
This general language isn’t all that helpful to the individual who has to decide how to spend extra cash right before filing bankruptcy. There are, however, some rules of thumb when you are planning for a bankruptcy. First, purchases in the ordinary course of living (groceries, this month’s rent, utilities, etc.) are a safe harbor. Second, making an extra vehicle payment where the bank has a security interest (lien) on the title and you owe about as much as the car is worth is also a safe bet. Third, don’t borrow money to buy an exempt asset. Finally, make sure that whatever exempt asset you purchase (like a firearm) is something that you have good faith reasons for purchasing other than to prevent your creditors from reaching the money.
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