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Pre-Bankruptcy Planning in Arizona: The Pigs and the Hogs

By Joseph McDaniel, Esq.

There is a phrase sometimes used to address the issue of pre-bankruptcy planning in Arizona, and it always made me a little cranky because it was flippant, and it provided no guidelines whatsoever for an Arizona Bankruptcy Attorney trying to make decisions about a bankruptcy in Phoenix, or Chandler, or Mesa, or Gilbert, or anyplace else in Arizona.

The bad phrase?

"Pigs get fat, and hogs get slaughtered."

That would seem to suggest that the amounts of non-exempt property being converted into exempt property is the single most important guideline for the propriety of pre-bankruptcy planning.

And that would be wrong, insolvency breath!

The critical element in most of the better written cases, like In re Crater, is subjective intent.

That is, did the debtor who sold the non-exempt vehicle and used the $40,000 in proceeds to pay down her mortgage have bad intent (to delay, hinder OR defraud the creditor), or did the debtor have good intent (a desire to care for her children by assuring that they would have a roof over their heads).

You wouldn't think that there would be any real issues in this area, because the legislative history to 11 USC 522 of the Bankruptcy Code was very clear:

As under current law, the debtor will be permitted to convert nonexempt property into exempt property before filing of the bankruptcy petition. This practice is not fraudulent as to creditors, and permits the debtor to make full use of the exemptions to which he is entitled under the law. (Emphasis in original).
H.R. REP. 95-595, at 361 (1977), reprinted in, 1978 U.S.C.C.A.N. 5963, 6317; S. REP. No. 95-989 at 76 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5862

But the minds of cranky creditors are nothing if not creative, and so many cases have arisen on this point.

And a lot of the bad case law on this issue came from jurisdictions that had "no upper limit" exemptions, and I can see why a Judge might not want to reward a debtor who had shoved five million dollars into a homestead in, say, Texas.

But this isn't Texas; this is Arizona.

And the Arizona Homestead Exemption is $150,000, unless it's subject to the Federal Exemption Cap, which is a topic for a different day.

And I've discussed this issue in my new Arizona Chapter 7 Blog, with a few more citations to authority!

Full post as published by Arizona Bankruptcy Attorney Blog on March 05, 2011 (boomark / email).