Pre-Bankruptcy Planning To Maximize Exemptions: Distinguishing What’s Proper From What Isn’t

Comparing and contrasting (photo by Marilyn Swanson)

By Donald L. Swanson

Pre-bankruptcy planning is an important part of representing an individual debtor in a bankruptcy case. In fact, such planning may be the most-crucial part of the entire bankruptcy process.

In pre-bankruptcy planning, the goal is to establish a strategy for the upcoming bankruptcy and an environment in which the strategy can succeed. In an individual debtor case, pre-bankruptcy planning includes efforts to maximize exemptions.

The trouble with exemption-maximizing is this: such efforts, if improperly handled, can land the debtor in trouble: like jeopardizing debtor’s exemption claims and debtor’s right to a discharge.

Unfortunately, the distinction between what is proper and what is improper can be difficult to discern.

Distinguishing between proper and improper efforts—An Illustration

Question: What distinguishes between proper and improper efforts to maximize exemptions?

Comparing and contrasting two companion cases from the Eighth Circuit Court of Appeals (which opinions issued on consecutive days) can help to illustrate the distinction between propriety and impropriety.

What follows is a summary of each case.

First Case—Proper Planning

The first case is Hanson v. First National Bank in Brookings, 848 F.2d 866 (8th Cir. 1988).

Here’s what happened.


Kenneth and Lucille Hanson filed Chapter 7 bankruptcy, with First National Bank as their principal creditor.

Hansons were farmers who, during the 1980s Farm Crisis, had financial problems. On advice of counsel, shortly before bankruptcy, they had their assets appraised. Then, they sold non-exempt assets at appraised values: a car, two vans, and a motor home to their son for $27,115, and some of their household goods and furnishings to Kenneth’s brother for $7,300.

With the sale proceeds, Hansons (i) purchased life insurance policies having cash surrender values of $9,977 and $9,978, and (ii) prepaid $11,033 on their homestead mortgage (which was held by First National). Both the life insurance cash values and the homestead are exempt from creditors under State law (the cash value exemption is capped at $20,000).

First National objected to Hanson’s cash value and homestead exemptions, claiming the on-eve-of-bankruptcy sales and payments demonstrate an intent to defraud creditors.


The Bankruptcy Court rejected First National’s objection, finding no extrinsic evidence of fraud.

On appeal, the District Court affirmed, as did the Eighth Circuit.

–Eighth Circuit’s Rationale

Here is the Eighth Circuit’s rationale for allowing the exemptions.

  • It is well established that a debtor’s conversion of non-exempt to exempt assets on the eve of bankruptcy, to place that property beyond the reach of creditors, will not, alone, deprive the debtor of the exemption; but
  • Such rule is not absolute: where the debtor’s acts are combined with extrinsic evidence of an intent to defraud creditors, exemptions will be denied.

The crux of the issue is whether extrinsic evidence of fraud exists. Here are contrasting examples:

Proper—Using non-exempt cash to satisfy a mortgage on an exempt homestead, shortly before filing, is proper because the payment protects the homestead asset and reduces debtors’ monthly living expenses; but
Improper—By contrast, when a debtor with a collapsing business transfers title to an expensive automobile, boat and trailer to his fiancée, without consideration, shortly before filing bankruptcy, debtor’s discharge is properly denied.

Extrinsic evidence of Hansons’ proper intent includes:

  • The purchasers paid fair market value—there were no gifts;
  • Titles were transferred correctly;
  • Hansons had reasonable explanations on why the transferred property remained on their premises;
  • Their son purchased the vehicles with a bank loan, obtained in his own name, and he kept all proceeds upon resale to a third party;
  • Sale to a family member, standing alone, is not extrinsic evidence of fraud;
  • Hansons did not borrow money to maximize their exemptions;
  • Hansons accounted for the cash they received from the sales;
  • Hansons had a preexisting homestead;
  • The exemptions that Hansons utilized are capped by value limitations; and
  • Hansons acted on advice of counsel.

Second Case—Impropriety

The companion case, issued the next day, is Norwest Bank Nebraska, N.A. v. Tveten, 848 F.2d 871 (1988).


Here’s what happened.

Omar Tveten was a 59 year old physician with no dependents, who owed creditors almost $19,000,000, mostly on personal guaranties of debts on investments whose value had deteriorated dramatically. By the time Tveten filed his Chapter 11 bankruptcy, he had converted almost all of his non-exempt assets, valued at $700,000, into exempt assets.

Tveten had been investing in real estate developments that were successful, initially.  So, other physicians joined him in organizing a corporation to make such investments. The investments were highly leveraged, and Tveten personally guaranteed the investment debts—as did others.

Then, Tveten’s investments began to sour, making him personally liable for amounts far beyond his ability to pay. So, Tveten filed Chapter 11 bankruptcy, after creditors sued him on guaranteed debts.

Before filing bankruptcy, Tveten consulted an attorney and began pre-bankruptcy planning efforts. He made seventeen separate transfers of non-exempt assets, for market value. Such transfers included cash sales of land to his parents for $70,000 and to his brother for $75,732. He also liquidated various assets: life insurance policies and annuities for $96,307.58, his KEOGH plan and individual retirement fund for $20,487.35, his corporation’s profit-sharing plan for $325,774.51, and his home for $50,000.

Tveten converted all $700,000 of the liquidation proceeds into life insurance or annuity contracts which, under State law, are exempt from creditors in unlimited amounts. He acknowledged that his purpose was to shield his assets from his creditors.

Norwest Bank objected to Tveten’s discharge.


After a trial, the bankruptcy court denied Tveten a discharge, based on findings that he intended to defraud his creditors by converting non-exempt assets into exempt assets shortly before filing bankruptcy.

On appeal, the District Court affirmed, as did the Eighth Circuit Court of Appeals.

–Eighth Circuit’s Rationale

Here is the Eighth Circuit’s rationale for denying Tveten a discharge:

  • Tveten’s conversion of non-exempt to exempt assets shortly before filing bankruptcy, standing alone, would not justify denial of his discharge, but
  • Tveten’s inferred intent to defraud, and his abuse of the protections permitted a debtor under the Bankruptcy Code, justifies denial of his discharge; and
  • Such intent and abuse are demonstrated by, (i) his awareness of a large judgment against him, (ii) his awareness of various pending lawsuits, (iii) his rapidly deteriorating business investments, (iv) his exposure to liability well beyond his ability to pay, and (v) his excessively-aggressive pre-bankruptcy planning efforts.

“The sole issue on appeal” is whether Tveten should have been denied a discharge based on his pre-bankruptcy planning efforts.

It is well established that converting non-exempt into exempt assets is acceptable. A contrary rule would be extremely harsh, especially where exemption amounts are minimal. However, denial of a discharge is proper when there is extrinsic evidence of an intent to defraud creditors.

One statutory ground for a discharge denial is this: transferring property “with intent to hinder, delay, or defraud a creditor.”

Precedents reveal a contrast: (i) numerous cases grant debtors a discharge, even though they converted non-exempt into exempt assets shortly before filing bankruptcy, but (ii) numerous other cases deny a discharge for such actions.

The Eighth Circuit distinguishes such differing results like this: Pre-bankruptcy efforts to maximize exemptions, in cases where a discharge is granted, are consistent with the Bankruptcy Code’s “fresh start” policy:

  • One such consistency is when the value amount of the exemption is limited; and
  • Another is when the maximized exemptions are critical to the avoidance of impoverishment, such as exempt cash, farm machinery and homestead.

The exemption utilized by Tveten, by contrast, is unlimited in amount (with potential for unlimited abuse) and involves non-crucial exemption assets (insurance policies and annuities). Moreover, Tveten’s actions are excessive: he liquidated nearly all his assets (including his home and his retirement assets) and placed the entire liquidated value into non-critical exemptions.

The Eighth Circuit quipped that Tveten “did not want a mere fresh start, he wanted a head start” and that his entire pattern of conduct demonstrates fraudulent intent.


Pre-bankruptcy planning is both critical and tricky. Such planning, (i) is essential to the development of an effective bankruptcy strategy and environment, but (ii) if improperly performed, can lead to both unwanted litigation and calamity.

The companion cases from the Eighth Circuit Court of Appeals summarized above are helpful in distinguishing pre-bankruptcy planning efforts that are proper from those that are not.

** If you find this article of value, please feel free to share. If you’d like to discuss, let me know.

2 thoughts on “Pre-Bankruptcy Planning To Maximize Exemptions: Distinguishing What’s Proper From What Isn’t

Add yours

  1. Super article! This article is required reading in our firm going forward. This is a really tricky topic for debtor’s counsel. You have a duty to explain what assets are exempt and what assets are not. Naturally, clients want to take action to protect themselves. So, you carefully discuss options and issues. But, you always feel a strong sense of risk. This article is a good guide to stay out of danger.

    Liked by 1 person

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