Structuring—Generally

The purpose of bankruptcy is to allow a debtor to avoid or repay the debts owed by him/her and give a fresh start.  When individuals or entities file for bankruptcy protection, the assets owned by them instantly turn into part of the bankruptcy estate, which will be temporarily controlled and managed by the United States Trustee appointed by the court.  The Trustee manages the assets throughout the bankruptcy, and if essential, sells the assets and allocate the funds to the creditors.  After all the creditors are settled the Trustee then return back the debtor’s remaining, or exempt, assets and the court closes out the bankruptcy case.

To protect assets in a bankruptcy proceeding, a debtor should prevent assets from becoming part of the bankruptcy estate.  A debtor may also use exemptions to prevent assets from being sold to facilitate payment of debtor’s creditors.

Pursuant to bankruptcy code, a debtor is allowed to keep necessary assets and property when s/he files a bankruptcy petition.  In a Chapter 13 bankruptcy, a debtor may keep everything s/he owns with no risk of losing any assets.  However, there are limitations to the amount of assets a debtor can protect in a Chapter 7 bankruptcy.  This varies from state to state.  In majority of jurisdictions, a debtor is able to protect home equity, retirement benefits, tools of the trade, etc.

In order to protect assets, a debtor should structure his/her assets properly.  Assets that need to be protected should be determined before a person file for bankruptcy.  If a debtor wants to keep his/her secured debts, such as car loans and home mortgages, s/he is allowed to continue to make mortgage payments in order to keep the car or the home.  On the other hand, a debtor can eliminate these types of debts, but s/he will be forced to give up the secured car or home.

A debtor can convert non-protected assets to protected ones.  A debtor may be able to convert certain non-protected assets, which would be liquidated or used to pay a portion of his/her debt in a bankruptcy, to protected assets, which do not become a part of the bankruptcy estate and/or are exempt from liquidation.

A bankruptcy exemption is the amount of a certain type of asset a person is permitted to keep in his/her bankruptcy.  The amount and type of exemptions available depends on the state’s laws.  While federal law affords for specific exemptions, many state laws afford their own exemptions, which take the place of the federal ones.  A few states allow debtors to decide between using the federal exemptions and the state’s exemptions.

A debtor may also reaffirm his/her business loans.  During a Chapter 7 bankruptcy, a debtor may choose to reaffirm any loan or debt s/he wishes.  Reaffirming a debt means agreeing to the court not to discharge from an obligation but to continue to pay the debt according to the original terms.

A debtor should file petition under the appropriate chapter of the bankruptcy code.  Filing under the correct chapter of the bankruptcy code is very essential to retain as many assets as possible throughout the process.


Inside Structuring—Generally