A husband and wife consulted with me about a pre-bankruptcy plan. They jointly owned a homestead which had equity. They maintained individual bank accounts and other financial assets. They had over $150k of joint unsecured debt. They wanted to start a new business which would provide their livelihood. The husband was reluctant to file bankruptcy because he may need bank financing; he could obtain financing with his debt level but not with a bankruptcy on his record.
The asked for my opinion of the following plan. For a month or two they would live on money in the wife’s separate bank accounts and accumulate money going into the husband’s accounts. When the wife spent all her money on living expenses she would file bankruptcy to discharge her share of the debt. They would form a company to start the new business and own the shares jointly as tenants by entireties. Tenants by entireties assets are exempt from creditors of one spouse but not from joint creditors.
After the wife filed bankruptcy they would sell their exempt homestead and invest some of the money in their jointly owned business. The husband alone would be liable on their debts because the wife’s bankruptcy would discharge her liability, and their business share would be an exempt entireties assets. The husband may file his own bankruptcy later if the business was not successful.
I told them their plan would likely work. There have been instances when a husband and wife filed sequential bankruptcies so that each could claim exemption of jointly owned entireties assets in their individual bankruptcy cases. When discovered, those plans fail because are considered abusive and in bad faith. In this case, there is no plan for closely spaced sequential bankruptcies to use, or missuse, the entireties exemption.
The clients’ plan is an example of combining bankruptcy and future asset protection. The couple is using one spouse’s Chapter 7 bankruptcy to turn their joint debt into the husband’s individual and separate debt. There is no fraudulent conversion involved by converting exempt homestead equity directly into business exempt as an entireties assets. After the wife’s bankruptcy the husband will rely on the non-bankruptcy entireties exemption to protect his new business from his own creditors in civil collection proceedings, if any.