Prudent Planning or Fraudulent Transfer? The Use of Nonexempt Assets to Purchase or Improve Exempt Property on the Eve of Bankruptcy

Authors

Alan N. Resnick, Maurice A. Deane School of Law at Hofstra University

Document Type

Article

Publication Title

Rutgers Law Review

Publication Date

1978

Abstract

The debt collection process in Anglo-American law is based on the creditor's right to receive payment from liquidation of the debtor's assets. Judicial procedures are available to the unsecured creditor for the purpose of converting the debtor's assets to cash. Whenever the debtor's matured liabilities are greater than his assets, the collection process may be characterized as one of "grab law" in which the first creditors to take the debtor's assets succeed in effectuating collection.

It is an economic necessity for creditors to have an efficient collection mechanism which gives them maximum protection in the event of default by the debtor. Nonetheless, all states shield the debtor from complete destitution by keeping certain property, for example, life insurance proceeds, beyond the reach of creditors. By permitting the debtor to keep those assets necessary for his economic survival, state exemption laws fulfill important social policies which must be balanced against the need for creditor protection.

When a debtor files a petition in bankruptcy, the bankruptcy trustee takes title to most of the debtor's property, thereby enabling the trustee to liquidate the debtor's assets for the benefit of creditors. The twofold purpose of federal bankruptcy law is to give the debtor a fresh start by discharging his debts and to make an efficient, fair, and equitable distribution of the debtor's assets among his creditors. By recognizing exemptions, both the Bankruptcy Act now in effect and the Bankruptcy Reform Act of 1978 permit the debtor to keep those assets needed for a fresh start while protecting the rights of creditors with respect to the debtor's nonexempt property.

Recommended Citation

Alan N. Resnick, Prudent Planning or Fraudulent Transfer? The Use of Nonexempt Assets to Purchase or Improve Exempt Property on the Eve of Bankruptcy, 31 Rutgers L. Rev. 615 (1978)
Available at: https://scholarlycommons.law.hofstra.edu/faculty_scholarship/22