What do pigs and hogs have to do with consumer bankruptcy? They can be potentially liquid “assets” in a Chapter 7, but in this instance they are acting as a symbols for Chapter 7 debtors.  Because Chapter 7 is a liquidation bankruptcy, protecting assets becomes very important.  That is where the pigs (those Debtors that want to intelligently, but reasonably protect assets) and the hogs (those that greedily hoard their assets from the trustees) come in.

Recently, there has been concern that Debtors are being more hog-like than pig-like and that they are being assisted by their attorneys in doing so.  Usually, bankruptcy attorneys refer to the strategic protection of assets as pre-bankruptcy planning. At times this means your attorney will identify what assets are non-exempt (for example, stocks in Arizona) and suggest that cash out your stock and use it to live off of or for other necessary expenditures.  A necessary expenditure may even be the purchase of an exempt vehicle or other exempt item that you need. The question becomes is pre-bankruptcy planning just good strategy or is it being so greedy that the act becomes fraudulent?

In 2002, the Arizona bankruptcy court heard a case concerning questionable pre-bankruptcy planning. This case is still considered good law despite having occurred before the bankruptcy law changes in 2005.  In In re Crater, 286 B.R. 756, , Judge Haines determined exemption,or pre-bankruptcy, planning, alone, is not enough to show that a Debtor may have intended to “hinder, delay, or defraud” his/her creditors.  In this case, the Debtors cashed out $40,000.00 of stock and used the funds to pay toward there second mortgage, which increased the equity in their home, but not beyond the allowable homestead exemption.  This was done just months before their bankruptcy was filed.  Judge Haines stated that there must be something in addition to the timing of an act to demonstrate an improper purpose. For example, concealment of the act on the bankruptcy paperwork (i.e. not disclosing the sale of stock as a transfer), transfer of property to a friend or family member, or providing an explanation for the transfer that demonstrates lack of honesty or credibility.

For those of you thinking about filing Chapter 7, I think this opinion is very significant. While, Judge Haines determined that the converting of a non-exempt asset to an exempt asset is not, on its face, fraudulent, he did not say that this will always be the case.  A frequent occurrence for bankruptcy attorneys is that we get a client in our office for an initial consultation who has all the “what ifs” down. “What if I take all of the money out of my bank account and hide it under the mattress?” or “What if I take this asset and move it here or put that asset there?” My response is, “why would you be a hog when you only need to be a pig?”  Pre-bankruptcy planning is important because we do not want our clients to lose everything, especially if there are options and ways to safely protect them.  We have to advocate for our clients.  But Chapter 7 debtors should be weary of getting too greedy and too creative. The issue in the Crater case was whether the Debtors should be denied their discharge.  This is what Chapter 7 debtors want most of all, and we should be careful that the right to receive the bankruptcy discharge is not lost because of hog-like behavior.