Someone filing for bankruptcy might be tempted to create or transfer assets in order to maximize exemptions.  This is allowed by bankruptcy courts in certain situations, but there are definitely limitations.  Also, the laws of the state in which you are filing bankruptcy can play a large part in what you can do.

The book, Personal Bankruptcy for Dummies, gives an example of an exemption that people often try to take advantage of before bankruptcy.  It says, “For example, if you had $1,000 in a bank account that wasn’t covered by an exemption, you’d lose it to a Chapter 7 trustee.  If, however, you make extra payments on your mortgage with that $1,000 before you file for bankruptcy, the increase in your homestead may be exempt.”

At the same time, another court can have a very different view of a transfer of assets.  You can be denied a discharge, your exemptions can be denied, or the court can force you to reverse the transaction.  Each of these can cause you a lot of headaches.

The book goes on to say, “Courts frequently render a finding of fraud whenever someone liquidates all his assets and pays off a mortgage, especially in states with unlimited homestead exemptions.”

In conclusion, you really need to check with a bankruptcy attorney before making any questionable pre-bankruptcy moves.  An attorney will be able to tell you exactly what to do for your situation.  That way your bankruptcy can go smoothly and you can make sure that you are making all the right moves.