This Note sides with the “no harm, no foul” approach in this debate, arguing that bankruptcy courts should not avoid prepetition transfers of otherwise exempt property under § 548 simply because an exemption was not actually taken and the transfer was instead the alternative path used to shield the property from collection. Part I of this Note explains the constructive fraud and exemption provisions of the Bankruptcy Code, including state opt-out provisions which are particularly applicable to this issue. Part I also discusses the legislative history of federal bankruptcy law with particular focus on the creation of the Bankruptcy Code in 1978, which altered the definition of the bankruptcy estate.
Part II addresses the split of authority among the United States Circuit Courts of Appeals as to whether a trustee can avoid a pre-petition transfer of otherwise exempt property. Part III argues that the minority “no harm, no foul” approach is the best approach for courts to take when analyzing pre-petition transfers of exempt property under the Bankruptcy Code. On the basis of this argument, Part IV recommends amending § 548(a)(1) to reflect the “no harm, no foul” approach.