CH7 Converting cash to Exempt Property

[17CharleyCo]

Hello, I jsut completed my tax filing and we will be receiving a refund of 8k. Our plan is to convert these funds to exempt assets but I'm looking for experiences in what to convert them into. We have earmarked 3k for building materials for repairs to our home. How much cash are we allowed to exempt? One of our post BK goals is to have an emergency fund and this money could go a LONG way to helping with that but I understand it is not exempt. Ideally I'd like to convert them into exempt assets that could possibly be converted back to cash in a pinch, so assets that would not depreciate largely in value. Any suggestions on where to go with this remaining 5k?

Could a Roth IRA be worth pursuing? I understand there are taxes on the eranings if I make a withdrawal under 5 yrs of openign the account but I can't imagine those earnings would be a huge number in the short term

[justbroke]

This is a very deep question and has hints of seeking legal advice on bankruptcy pre-planning. It's not a large amount of money, but you really need professional advice on what type of pre-planning can be done within your district/State without having the appearance of a fraudulent transfer. People have done bankruptcy pre-planning for a long time. There's nothing inherently wrong with it. As you suspect, you just need to do it correctly and within the parameters so that you don't give the appearance of fraudulently transferring property to hinder, hide, or delay creditors (or the Trustee).

If you want money after filing, you'll need to find exemptions to protect that money. I know that you're trying to find ways to preserve your cash or some illiquid asset (but still convertible to cash).

I can't recall anyone on here asking about converting cash to semiliquid exempt asset so that you could convert it after filing/discharge. I have seen people convert non-exempt cash to exempt assets (IRA, retirement funds, secured debt paydowns such as home mortgage, food, home repair, etc). In all those cases, the conversions were long-term (not temporary to liquidate after discharge).

I'm looking forward to other responses! Again, there's nothing inherently wrong with planning or "generally" converting a non-exempt asset into an exempt asset.

[17CharleyCo]

I'm definitely trying to pre-plan as much as possible. I did speak with my attorney about this in our first meeting but we didn't dive into it too deeply. He gave me general advice on necessities such as attorney's fees, food, clothing, repairs to the home etc. I wouldn't be planning on liquidating or converting back to cash immediately after filing but more looking to liquidate the asset in a pinch should we need to. Currently, we have almost zero exemptions to exemptions to claim outside of vehicle, building materials, and homestead. All the other typical things like clothing, furnishings, and appliances obviously.

With zero credit after filing, limited cash resources that aren't exempt, we will be in a big world of hurt should a major expense come up. One example would be that both family vehicles are 16 and 12 yrs old with lots of mileage. Should one or both go down we'd be in a huge hole.

[justbroke]

I don't know if you're worried about car payments after filing, but let me tell you this. After you receive your discharge, you'll be inundated with offers for vehicle loans. The interest rates are likely to be in the teens but the lenders will be falling all over themselves to get you in a new car. Been there. Done that!

I can actually sympathize with you on the unexpected. Life happens and we don't know what tomorrow will bring. I had less than $20 in my pocket the day I filed. I couldn't even pay for a cab all the way home from the courthouse. My future, though, looked good because I was employed, in good health, and had a roof over my head. I did have a big emergency come up weeks after filing... four new tires for the car. Unexpected and unplanned but I survived.

The problem with illiquid assets is that, by definition, you will take a loss on that item. There aren't too many things that would give you quick liquidation anywhere near 50% of what you paid for it... which you could also exempt!

[17CharleyCo]

I don't know if you're worried about car payments after filing, but let me tell you this. After you receive your discharge, you'll be inundated with offers for vehicle loans. The interest rates are likely to be in the teens but the lenders will be falling all over themselves to get you in a new car. Been there. Done that!

I can actually sympathize with you on the unexpected. Life happens and we don't know what tomorrow will bring. I had less than $20 in my pocket the day I filed. I couldn't even pay for a cab all the way home from the courthouse. My future, though, looked good because I was employed, in good health, and had a roof over my head. I did have a big emergency come up weeks after filing... four new tires for the car. Unexpected and unplanned but I survived.

The problem with illiquid assets is that, by definition, you will take a loss on that item. There aren't too many things that would give you quick liquidation anywhere near 50% of what you paid for it... which you could also exempt!

Glad to see you get where I'm coming from. My family and I are not in the position to take on a vehicle payment so we're not looking in that direction. I know there would be a loss to take on any assets that I tried to liquidate if I needed to but there have to be some sort of property I could exempt that holds its value somewhat well. I just don't know of any :/ I'm sure we will work it out.

Maybe some home improvements like upgrading our HVAC system since its archaic, replacing our old and inefficient fridge, replacing a fence...Obviously not assets I could sell in pinch. Just spitballing now.

[leonel9]

I would for sure speak with a local attorney before dumping $5k into an IRA, if you do not have a pattern of making $5k contributions. Even if you do, I would think it would be reasonable to argue that you continued monthly contributions. It doesn't seem reasonable to me to put it in with a few months of filing bankruptcy, especially if you will have stopped paying your creditors at the same time.

With that in mind, in addition to auto/home repairs, stocking up on food, I would also look into term life insurance. The payments can potentially assist with the means test.

When are you planning on filing?

[17CharleyCo]

I

With that in mind, in addition to auto/home repairs, stocking up on food, I would also look into term life insurance. The payments can potentially assist with the means test.

When are you planning on filing?

Our plan is to file next month. We qualify for CH7 based on my income so as I understand there wouldn't be a need to conduct a means test.