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Archive for the ‘assets’ tag

A Chapter 7 “Asset Case”

June 19th, 2017 at 7:00 am

Most Chapter 7 cases are “no-asset” ones. So, what’s an “asset case,” and is it good or bad for you?  

 

The More Common No-Asset Case

The Chapter 7 bankruptcy option is sometimes confusingly called “liquidation” bankruptcy. That implies that something you own gets “liquidated”—sold.  But in most consumer Chapter 7 cases that’s not what happens.

Under Chapter 7 you get a discharge (legal write-off) of most or all of your debts you want to discharged. In return only those things that you own, IF ANY, that do NOT fit within a set of property exemptions must be turned over to your bankruptcy trustee, who then sells them and distributes the proceeds to your creditors.

The reality is that in most Chapter 7 cases everything DOES fit within the set of applicable property exemptions.  So most consumer debtors do NOT turn ANYTHING over to the trustee, and get to keep everything.  Nothing is actually “liquidated.”  Because the trustee takes no assets for distribution to the creditors, this is called a “no asset” case.

Asset Case

So naturally, if you file a Chapter 7 case and own some assets which do NOT fit within the applicable exemption, that’s called an “asset case.” The trustee has assets to take and sell, and distributes their proceeds to creditors.

Reasons Non-Exempt Assets May Not Result in an Asset Case

Just because you have assets that do not fit the applicable property exemptions does not necessarily mean you have an asset case. The trustee is not necessarily obligated to take non-exempt assets, for the following reasons: 

1. The value of the non-exempt assets may be too small to justify the effort. The trustee has to go through quite a few steps in collecting and distributing assets in a Chapter 7 case. If the anticipated amount of collected assets is small, the effort going through all the steps may not be worthwhile.  Talk with your bankruptcy lawyer about what your trustee may consider “too small,” because that varies with different trustees and on your circumstances.

2. The cost and risk involved in collecting or liquidating the asset(s) may not be worthwhile.  You may have an asset in the form of a claim against somebody which may be worth some money. But it may cost a lot in attorney fees to pursue it, and there may not be a positive result.  The trustee may decide that the odds of winning the lawsuit or claim do not justify paying the attorney fees.  

3. An asset can be “burdensome” and not worth collecting for a various practical reasons.  Examples include real estate tainted by hazardous waste, and a pedigree show dog that has a serious temperament problem.

Not Want an “Asset Case”?

Don’t you want to avoid having an “asset case,” avoid having the trustee take something from you?

Sure, in most cases you want to keep everything you own and not have it go to your creditors. But, sometimes you don’t mind giving up something, especially if doing so is the best alternative for you.  

You may not mind giving up an asset if you don’t need it any more. You especially many not mind giving up the asset if the trustee pays the proceeds to creditors you want to be paid anyway.

Paying Your Important Creditor(s) Through Chapter 7 Liquidation

Let’s say you’re a small business owner with leftover business assets after you’ve shut down the business. (Assume these asset are not “tools of your trade” you need for earning your future living). You don’t need or want the business assets. You’d rather give the trustee the headache of divvying them up among the creditors. Surrendering those former business assets to the trustee may well be much better than going through a 3-to-5 year Chapter 13 payment plan just to keep those assets. 

How could the proceeds from those assets possibly go to pay creditors you want to be paid?  This can happen because of the priority rules which determine which debts get paid first. Those priority rules yield results that are often consistent with your own priorities.

For example, the trustee pays any accrued child or spousal support, some tax obligations, and various other categories of “priority” debts in full before paying anything to the conventional “general unsecured” creditors. These special debts are often the ones you want to pay, because they are often not discharged in bankruptcy. So you are simply using the law’s priority rules to your advantage.

Easier Said Than Done

To be clear, things have to fall into place correctly for this to happen. A number of considerations have to be met in order for your assets to flow through a Chapter 7 trustee to the debts you want or need to be paid.

The point is that there are circumstances in which a Chapter 7 “asset case” is not such a bad thing. Indeed it can be your best alternative.

 

A “No Asset” Chapter 7 Case

June 12th, 2017 at 7:00 am

Most individual consumer Chapter 7 cases are “no asset” ones. This means that the Chapter 7 trustee doesn’t liquidate any debtor assets.

 

Chapter 7 Is a Liquidation Form of Bankruptcy

When think “liquidation,” this is what you may come to mind. A business decides to close down and files a Chapter 7 “liquidation” bankruptcy. A bankruptcy trustee gathers and sells all of the business’ assets and pays its creditors as much as it can out of the proceeds.

When you as an individual file under Chapter 7 it’s still a so-called “liquidation” bankruptcy, but it’s usually completely different. Nothing of yours is liquated by your Chapter 7 trustee. The reason is that, unlike a corporation, you are entitled to many property exemptions. These are provisions in the law which protect what you own from your creditors. They protect your property from your Chapter 7 trustee, who acts on behalf of your creditors. Usually everything you own fits within the exemptions that apply to you, protecting everything.

That is called ano asset Chapter 7 case.” The trustee does not liquidate anything.

But in some Chapter 7 cases, everything is not exempt. This is called an “asset Chapter 7 case.”

In this blog post we’ll look at some practical aspects of “no asset” cases.

Anticipating a “No Asset Chapter 7 Case”

After deciding with your bankruptcy lawyer to file under Chapter 7, together you prepare your property and exemption schedules. See Schedule A/B and Schedule C.

In less than half the states, you will have the option of using your state’s property exemptions or a set of federal ones. The federal ones are in the Bankruptcy Code. (See Section 522(d).) In the rest of the states you must use the exemptions provided by the state.

In many situations it will be clear that everything you own fits within the exemptions available to you. Everything fits reasonably neatly into exemption categories. For example, you own a vehicle, and there is an available vehicle exemption. And everything you own is worth no more than the maximum value allowed. For example, your vehicle is worth $4,500 and the exemption maximum is $5,000.  

So your lawyer informs you that based on the information you’ve provided, you should have a “no asset case.” The trustee is not likely to decide that anything you own is not exempt and therefore considering taking and liquidating.

The “Meeting of Creditors”

Then about a month after filing your case, you and your lawyer attend a so-called “meeting of creditors.” Although your creditors are invited, usually none, or maybe only one or two, attend. The meeting is presided over by the assigned Chapter 7 trustee. Usually the main thing that happens is that the trustee verifies that everything you own is exempt and protected. The trustee asks you a few questions under oath verifying the accuracy of what you put on your asset schedules.

Then, depending on the personal practices of the individual trustee, he or she may announce towards the end of the meeting that it’s a “no asset case.” If you do not hear that announcement, your lawyer will likely tell you right after the meeting that that’s effectively the situation. That’s because your schedules show that everything you own is exempt, and the trustee is not asking for further information.

The Trustee’s “No-Asset Report”

Whether or not the trustee announces it at the hearing, if the trustee determines that the case is a no asset case he or she files a “no-asset/no-distribution report.” Here’s a sample of that simple report from the Handbook for Chapter 7 Trustees. At the heart of it is the following statement: “I… report that… I have made a diligent inquiry… and that there is no property available for distribution from the estate over and above that exempted by law.”

 

Next time we’ll get into what happens when things don’t go quite as smoothly as this.

 

“Property of the Estate” in Chapter 7 Bankruptcy

May 24th, 2017 at 7:00 am

To find out if you can keep everything you own in a Chapter 7 case, the first step is finding out what’s in your bankruptcy estate.

 

In most consumer Chapter 7 bankruptcy cases, the person filing the case (the debtor”) gets to keep everything they own. But getting to that point is a process. The first step in that process is understanding “property of the estate.” (The later step is to determine whether all of the property of your estate is protected, or “exempt.”)

An “Estate” in Bankruptcy

We normally think of an estate as the property owned by a person at the time he or she dies. But more broadly it’s “all the property and money that belongs to someone.” In bankruptcy it has an even broader meaning, including a number of categories of property.

When you file a Chapter 7 case, doing so automatically creates an estate. That estate includes a different categories of property. Today we’ll focus on what for most people is the main category. In most simple cases it is the only category of property involved in your Chapter 7 case.

“All Legal and Equitable Interests of the Debtor”

This first category iincludes “all legal or equitable interests of the debtor in property as of the commencement of the case.” This essentially means everything you own at the moment you file your case. See Section 541(a)(1) of the U.S. Bankruptcy Code.

Property “Wherever Located and by Whomever Held”

Whether or not you have possession of something, or where it happens to be located, do not matter. See Section 541(a) of the Bankruptcy Code.

If it’s legally yours, then even if it’s not in your possession when you file your Chapter 7 case, it becomes property of the estate.

If it is not legally yours although it’s in your possession, it does not become property of your Chapter 7 estate.

Here are a couple examples. If you borrow your sister’s rifle for a hunting trip and just haven’t returned it at the point you file your case, that’s NOT part of the property of the estate. However, if your dad gifts you his rifle, which you keep in his gun safe away from your kids, that rifle IS property of the estate.

At “the Commencement of the Case”

Timing is crucial and precise.

The “commencement of a case… creates an estate. Such estate is comprised of…  all… interests of the debtor in property as of the commencement of the case.” 

This means that the property of the estate excludes something you owned the day before filing but no longer do. It means that the property of the estate excludes something you didn’t own until the day after filing.

For example, if, on the day before filing bankruptcy, you spend $1,000 on food and a vehicle repair, that $1,000 is not property of your bankruptcy estate. Or if, on the day after you file, a relative gives you $500 to buy school clothes for your kids, that $500 is not property of your estate.  

Important Timing Exceptions to the “Commencement of a Case”

There are exceptions. Property of the estate can sometimes include certain possessions and money you owned before filing bankruptcy. It can also include possessions and money you got after filing. We’ll get into these in our next few blog posts.

 

5 Things to Know to Protect Your Property through Exemptions

May 17th, 2017 at 7:00 am

Most of the time you get to keep everything you own when you file bankruptcy. It’s all covered by property exemptions. But not always.   

 

Here’s how property exemptions work in bankruptcy to protect what you own:

#1.  The basic rule:

You get to keep everything you own as long as it all fits within “property exemptions.” These are categories of assets—each usually with a maximum dollar amount—that you are allowed to have. See Section 522 of the U.S. Bankruptcy Code.

But there is a lot more to this than just matching assets to exemptions. What is and is not covered by some exemption categories is not always clear. In many states you get to choose between a federal and a state set of exemptions. You have to know which state’s exemptions apply to you if you’ve moved recently. Applying these laws often requires knowing how the state and federal statutes have been interpreted in court decisions, and/or how the local trustees and judges are enforcing them.

#2.  Federal and state sets of exemptions: 

Bankruptcy law is federal law, as the U.S. Constitution make clear. See Article I, Section 8, Clause 4 of the Constitution. But Congress has exercised its power by giving each state a choice. Each state can decide whether to allow its residents to use a federal set of exemptions in the Bankruptcy Code for bankruptcies filed in that state, or instead require them to use of a set of exemptions created by the state.

So you have to first know which set of exemptions you are allowed to use. And then, if you are allowed to use either one you need to know which of the two sets would be better for you.

#3.  You have to qualify for your state’s exemptions by living there long enough:

Which exemptions you can use can depends on how long you’ve lived in the state you’re living in now.  You can use the exemptions available in your state only if you’ve been “domiciled” there for two full years before filing bankruptcy. (“Domiciled” basically means living there during that time, but that can also depend on various factors.)

Otherwise you have to use the set of exemptions available to residents of the state you were “domiciled” in during the 6-month period immediately before those two years.

The exemption laws in your prior state may be better or worse than in your new state. Sometimes significantly so. So, sometimes it makes sense to hurry the filing of your case to take advantage of your prior state’s exemptions. Other times it makes sense to delay filing to take advantage of your new state’s exemptions. 

#4.  The importance of pre-bankruptcy planning:

You can often protect assets not covered by the available exemptions with wise pre-bankruptcy planning.  This is one of the important reasons to meet with a competent bankruptcy lawyer, and to do so as soon as possible.

Pre-bankruptcy asset-protection plans often need a relatively long period of time for them to be effective. So it’s crucial that you get thorough legal advice well before creditors’ actions force you into filing bankruptcy. Doing so can make the difference in being able to protect what’s important to you.

#5.  Paying to keep your own asset:

Although it may feel odd, you can often pay for the right to keep an otherwise unprotected asset. Chapter 7 may otherwise definitely be your best option, but you don’t want to lose something that’s not exempt. Paying to keep it may be better than spending 3 to 5 years in a Chapter 13 case to protect it.

Most Chapter 7 trustees are willing to accept your payment of the fair market value of the item, and sometimes less. That’s because you paying them can save the trustee the costs associated with selling that item. So the trustee just needs to receive the net amount he or she would receive after paying the costs from a hypothetical sale. For example, if you have a non-exempt boat you’d like to keep, you could pay a projected sale amount minus a boat broker’s sales commission, transport and storage/dockage fees, and such.

Also, many trustees are willing to accept your monthly installment payments to buy back a non-exempt asset. A trustee is willing to take some risk because you are at his or her mercy. If you don’t pay the agreed payments you will lose your ability to discharge (write off) your debts. 

Using the Right Set of Property Exemptions

May 15th, 2017 at 7:00 am

Usually you use the property exemptions available for the residents of your state. But not if you haven’t lived there long enough.

 

Property Exemptions in Chapter 7 Bankruptcy

In most consumer Chapter 7 “straight bankruptcy” cases you get to keep everything you own. That’s because everything you have fits within the property exemptions that are available for you to use.

To make sure that happens you need to:

  1. know what set of exemptions you are allowed to use
  2. apply the right exemption to each asset
  3. determine whether the dollar values of your assets fit within the maximum allowed values of the applicable exemptions

For example, if you own a guitar which has a fair market value of $500 you need to:

  1. know which set of exemptions are available to you as a residents of your state
  2. see whether that set of exemptions includes one specifically for musical instruments, or for some broader category such as “personal effects” which could include your guitar
  3. determine whether that exemption category fully covers your $500 value (including any other assets must also fit within that exemption category)

The rest of this blog post focuses on the first of these—using the right set of exemptions.

Using the Right Exemptions

Doing this takes two steps.

First step: there is a federal set of bankruptcy exemptions, and each state has its own set of exemptions. If you live in one of 19 states, you can use either that state’s exemptions or the federal ones. These 19 states are:

Alaska, Arkansas, Connecticut, Hawaii, Kentucky, Massachusetts, Michigan, Minnesota, New Hampshire, New Jersey, New Mexico, New York, Oregon, Pennsylvania, Rhode Island, Texas, Vermont, Washington, and Wisconsin.

If you live in any other state the federal exemptions are not available. You must use that state’s exemptions when you file bankruptcy.

Obviously, you’ll be in trouble if you try to use the federal exemptions if you live in any of the other 31 states, or if you use a different state’s exemptions. The trustee would object, and you’d have to change to the right set of exemptions. And then you might no longer be able to protect something of yours you thought you could.

Second step: you must qualify to use the exemptions available to those in the state where you live by living there long enough. The rule is generally simple enough. You can use the exemptions available in the state where you’ve been living if you’ve been there for two years.

More precisely, the Bankruptcy Code says it’s where your “domicile has been located for the 730 days immediately preceding the date of the filing of the petition.” (2 times 365 days = 730 days.)  See Section 522(b)(3)(A).

And if you haven’t been living in the state for a full two years, then you use the exemptions for the state where your “domicile was located for 180 days immediately preceding the 730-day period.”

An Example

So let’s say you moved 18 month ago from Pennsylvania to Arizona, after living in Pennsylvania for 6 months, and before that in Massachusetts for 10 years.

Since you haven’t lived in Arizona for two full years, you can’t use the exemptions usually available there. You don’t use exemptions available in Pennsylvania either since you were living there during the last two years not right before. Massachusetts is where you were living during the 6 months just before two years, so you use the exemptions available there.

Massachusetts is one of the 21 states giving you a choice between the federal and state’s sets of exemptions. So you file your bankruptcy case where you are living in Arizona. But you use the exemptions available in the state you lived in two states ago. And that gives you the option of the Massachusetts and federal sets of exemptions

Two Quick Practicalities

One: This two-year rule could work to your advantage as well as possible disadvantage. If you’ve moved from a state with better exemptions for the assets you own, being required to use that prior state’s exemptions could protect your assets better.

Two: To the extent that you have the flexibility to speed up or delay your bankruptcy filing, you may want to time your filing to take advantage of the more favorable set of exemptions.  

 

The Chapter 7 Trustee Looking into an Asset

May 10th, 2017 at 7:00 am

What happens when something you own is not or may not be exempt (protected)? What does the trustee do about this and what is the end result?

 

Chapter 7 is the “liquidation” form of bankruptcy. But in our last blog post we introduced the bankruptcy trustee as an only sometimes liquidator. That’s because in most Chapter 7 cases nothing gets liquidated. Nothing gets taken from you and sold to pay your creditors. And that’s because most of the time everything you have is “exempt,” protected.

But what happens when you own something that is not covered by your allowed property exemptions?

One of two things will happen. The trustee looks into it and decides your asset is not worth liquidating after all. Or he or she may decide it is worth liquidating. We cover the first situation today, the second one in an upcoming blog post.

Three Scenarios

Your trustee may get interested in an asset of yours under these three scenarios:

  • You disclose on your asset and exemption schedules that you own an asset not covered by an exemption.
  • The trustee believes you may have undervalued an asset.
  • The trustee disputes that an exemption you claimed applies to your asset.

We get into the first of these scenarios today.

Disclosed as Not Exempt

When filing a bankruptcy case you list your assets, or property, on Schedule A/B. Then on Schedule C you list the “Property You Claim as Exempt.”

Again, often you show that everything on Schedule A/B is completely exempt on Schedule C. But let’s say there’s something that’s shown not to be exempt. Let’s say you own a second vehicle, and your first vehicle’s value exhausts the amount of vehicle exemption available in your state. So in this scenario your second vehicle is not exempt.

So the trustee sees that and wants to check out this non-exempt asset, to see if it worth liquidating. Assume you’ve valued it at $1,000 based on the fact that it’s old, needs brakes and maybe some transmission work.

The trustee may or may not decide it’s worth taking this vehicle from you to sell and pay its proceeds to your creditors.  The trustee has a lot of discretion of deciding this.

So in this scenario he or she may ask to have you take it to a particular vehicle repair shop for an independent assessment about the seriousness of the required repairs, and the likely saleable value of the vehicle. Let’s say the repair shop verifies that your vehicle needs new brakes and has a definite transmission problem. The trustee finds out that in light of this your $1,000 valuation was fair, or maybe even a little generous.

Factors in the Trustee’s Decision

You may think that for sure the trustee will take the vehicle. After all, getting $1,000 to your creditors is better than them getting nothing, right?

But the creditors wouldn’t likely get anywhere close to $1,000, even if the vehicle sells for that much. The trustee knows that there are liquidation costs that would offset any sale proceeds. These likely include towing and storage fees, and auction or advertising costs. Plus the trustee gets paid a fee—usually about 25% of the first $5,000 collected. (See Section 326 of the U.S. Bankruptcy Code.)

The trustee will likely look at the number, amount, and the nature of the debts. If there are a lot of debts adding up to a relatively large amount, so that a very small percentage of the debts would get paid out of the vehicle sale proceeds, the trustee would be less inclined to take and sell the vehicle.

If you owe a “priority debt”—such as recent income taxes, the trustee may be less inclined as well. That’s because that tax debt gets paid before anything goes to the other debts. So if the tax debt is more than the amount available to pay out to all the creditors, all the money would go to the tax debt. No other debts would be paid. Since this kind of tax debt survives Chapter 7 bankruptcy, you would have to pay it anyway. So there’s very little practical benefit to the trustee paying part of it by selling your second vehicle.

The Relatively Detailed Distribution Procedure

Finally, there’s a fair amount of effort for the trustee involved in the distributing of funds to creditors. All creditors are given an opportunity to file “proofs of claim.”  The trustee has to review each of them to see if they are valid, objecting to those that appear not to be or that need more documentation. Then the trustee may prepare and the court sends out a notice about the proposed sale of the vehicle. Creditors and other interested parties could object to it. Then there’s a notice about the proposed distribution of the funds to creditors, which could also be objected to. Same thing with the trustee’s proposed fee (although some of these notices may be consolidated into one).

This is a lot of paperwork, over the course of several months, all of which takes effort by the trustee. Most trustees are not going to go through all that for a couple hundred dollars.

“Insufficient Assets for a Meaningful Distribution”

So, there is a good chance that in this situation the trustee would decline to take that second vehicle. He or she would formally report that there are “insufficient assets for a meaningful distribution to the creditors.” The trustee would declare the case to be a “no-asset” Chapter 7 case—there are no assets worth liquidating and distributing.

 

The Trustee in a Consumer Chapter 7 Case

May 8th, 2017 at 7:00 am

Besides your creditors, the main person you need to be careful about in a “straight bankruptcy Chapter 7 case is the trustee. Who’s that? 

 

The Trustee Is a Liquidator, Sometimes

Chapter 7 is sometimes called the “liquidation” kind of bankruptcy. But in most consumer cases no liquidation—the selling of assets—happens. That’s because usually everything the debtor owns is “exempt”—protected from liquidation.

The Chapter 7 trustee is the official who determines if a debtor has any assets that are not exempt. If so, the trustee takes possession of them, sells them, and distributes the proceeds to the creditors.

Information for the Trustee

The main source of information for the trustee about your assets is the paperwork you provide him or her. Most of that is in contained in the documents you and your lawyer prepare and file at the bankruptcy court. You also provide some verifying documents to the trustee directly.

The bankruptcy documents consist of dozens of pages of “schedules” or lists of your creditors and your assets, and answers to many financial questions. You review these carefully with your lawyer, sign them under penalty of perjury, and they’re filed at court.

These documents include a list of the “exemptions” you’re claiming. Those usually show that everything (just about everything) you own is protected from liquidation by the trustee.

The “Meeting of Creditors”

The trustee is in charge of the so-called “meeting with creditors.” It’s called a “meeting of creditors” but in consumer cases often only the trustee, you, and your lawyer attend. It happens about a month after filing your Chapter 7 case. The trustee asks you and your lawyer questions based on the information in the documents filed and otherwise provided. The questions mostly focus on your assets and exemptions you’ve claimed.

This is an important but usually rather informal meeting. It usually lasts about 10 minutes, sometimes shorter. Usually the bankruptcy documents point clearly to the fact that all your assets are exempt. If so, the trustee may (depending on local custom) “declare the case to be a no-asset case.” This means that everything you own is exempt; you have nothing for the trustee to liquidate. You get to keep everything.

Other Trustee Responsibilities

It’s not unusual for the trustee to ask debtors or their attorneys to provide additional information or documents. These are usually to clarify or verify what is in the bankruptcy paperwork. He or she can also investigate independently or through the help of others. For example, if you own something potentially valuable the trustee could have an appropriate expert appraise it to see your valuation is reasonable.

Also, if the trustee sees something suspicious he or she could pursue the matter. At some point the trustee could refer it to the United States Trustee. The U.S. Trustee is the enforcer of the bankruptcy system, and essentially the trustee’s boss. This office usually stays in the background in consumer bankruptcy cases. Part of its job is to oversee compliance with the bankruptcy laws. The U.S. Trustee mostly tends to get involved if a debtor has tried to hide significant assets.

These kinds of problems almost never happen as long as you are honest with your lawyer. Be candid and thorough with him or her so that potential problems can be avoided. There are usually workable solutions.

Is the Trustee Your Adversary?

Yes, it’s the Chapter 7 trustee’s job to represent your creditors. Mostly he or she does that by finding non-exempt assets to liquidate and distribute to the creditors. And the trustee can refer you to the U.S. Trustee if he or she encounters any serious bad behavior. So the trustee is legally your adversary.

But most of the time nothing bad happens. Your only contact with the trustee is often nothing more than a reasonably friendly “meeting of creditors” that’s over before you know it.

 

Fraudulent Transfers with Actual Intent to Defraud

April 26th, 2017 at 7:00 am

Selling or giving away something to prevent your creditors from getting it may make a certain amount of sense but could be very dangerous. 

 

Good and Bad Intentions

Last time we introduced “fraudulent transfers.”  We said that in spite of how the term sounds, a fraudulent transfer does not necessarily happen with bad intentions. You could innocently sell or give something away during the two years before filing bankruptcy. That could still be a fraudulent transfer, as long as that sale or gift satisfied a number of conditions.

However, a fraudulent transfer CAN come with bad intentions. Today we cover those made “with actual intent to hinder, delay, or defraud” creditors. (Section 548(a)(1)(a) of U.S. Bankruptcy Code.)

Hiding Assets from Creditors

We can generally agree that in normal circumstances legally owed debts ought to be paid. The law backs this up with legally established procedures for collecting debts. Some of those procedures are centuries old. The law of fraudulent transfers is one of those. It goes was back to the Fraudulent Conveyances Act of 1571 in England, nearly 450 years ago.

A fraudulent transfer is basically a debtor’s selling or giving away of an asset to prevent a creditor from using it to get paid. When done with actual intent, it typically involves a debtor who gives away assets—or sells them for a very low price—as part of a scheme to leave himself with nothing to pay his creditors.

“Avoidable” by the Bankruptcy Trustee

The remedy for a fraudulent transfer involves undoing the transfer, selling the asset transferred, and using the sale proceeds to pay debts of the person involved in the fraudulent transfer.

This can happen outside a bankruptcy case. Most states have fraudulent transfer laws that allow creditors to undo a transfer when certain conditions are met.

But in bankruptcy cases the bankruptcy trustee acts on behalf of all the creditors. If the trustee succeeds in “avoiding” the transfer, he or she sells the asset and pays the creditors according to a detailed priority arrangement laid out in the federal bankruptcy law.

“Transfer”

We have been referring to sales or gifts of assets, but the term “transfer” is very broad. It includes, among others:

each mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with—(i) property; or (ii) an interest in property.

A transfer can also consist of the creation of a lien on an asset. (See Section 101(54) of the Bankruptcy Code for the meaning of “transfer.”)

Examples

To make better practical sense of this, here are a couple examples of fraudulent transfers done with actual intent.

A year ago you had two free and clear vehicles in your name. You learned that under the laws within your state you could “exempt,” or protect, only one based on their value. So to keep it away from your creditors, you signed one vehicle over to your 22-year old son. He didn’t pay anything for it. You’ve now filed a Chapter 7 bankruptcy to discharge all of your debts. The transfer of the vehicle’s title was an intentional act to prevent your creditors from being paid. The bankruptcy trustee would likely have the right to require your son to give him or her possession and title of the vehicle. The trustee would then sell it and pay the proceeds to your creditors.

You and your two siblings inherited a beach house from your parents. You have serious debt problems. You don’t want your share of this property to go to your creditors. So you and your siblings put the property into a family trust. When you file bankruptcy 18 months later, this transfer intended to prevent your creditors from being paid could be considered a fraudulent transfer. Your siblings would likely have the right to pay the trustee for your share of the property. Otherwise, the property might need to be sold to give the trustee the value of your share.

Conclusion

While it’s understandable that you would want to protect something from your creditors, it’s clearly dangerous to try to do so without legal advice. There are often ways of meeting your goals in a legal way. The asset in question may be “exempt” and already protected. It may make sense to sell it and use the proceeds in a legally appropriate way. You may well be able to protect it through a Chapter 13 case. There can be any of a number of practical solutions. Discuss the situation thoroughly with your bankruptcy lawyer, before you make the transfer. You are much more likely to meet your goals and avoid the headaches of a fraudulent transfer.

 

Introducing Fraudulent Transfers

April 24th, 2017 at 7:00 am

“Fraudulent transfers” have similarities to “preferences.” They are both worth understanding because they can cause unnecessary hassles.  


Asset Timing in Bankruptcy

Your Chapter 7 trustee usually mostly focuses attention on determining whether any of your assets are not “exempt.” You get to keep all exempt assets. If there are any assets that are not exempt, the trustee has the right to take them, liquidate them, and pay the proceeds to your creditors. However, in most consumer Chapter 7 cases all the assets are exempt so the trustee takes nothing. The debtor gets to keep everything.

In this process, the trustee is only interested in what you own at the moment you file your bankruptcy case. This timing gets quite precise. For example, what counts is the amount of actual cash you have on hand at that moment of bankruptcy filing. Same thing with the balance in your checking account(s) at that moment, and all your other assets. The amount of cash or money in your accounts the day before or the day after usually doesn’t matter. What matters is what you had at the moment of filing, with these and all your other assets.

Exceptions: “Preferences” and “Fraudulent Transfers”

This fixation on assets at the moment of filing has a few significant exceptions. We just spent our last six blog posts discussing “preferences.”

The law of preferences allows a bankruptcy trustee to get at something you owned BEFORE filing your Chapter 7 case. That “something you owned” is the money (or some other asset) with which you paid a debt during the 90-day (or sometimes the 1-year) period before filing bankruptcy. See Section 547 of the U.S. Bankruptcy Code. Under limited circumstances the trustee can recapture that payment, requiring the creditor to give that payment to the trustee. The trustee essentially undoes, or “avoids,” that payment. The trustee then uses the money turned over by that one creditor just like any other available debtor asset. The money is paid out to your creditors according to a detailed set of priority rules.

The law of fraudulent transfers is ANOTHER way for a trustee to get at something you owned before your bankruptcy filing. But a fraudulent transfer involves assets you sold or gave away, instead of payments you made to a creditor. The sale or transfer can be to anyone. The look-back time period is much longer—a full two years before filing, and sometimes can be longer. See Section 548 of the U.S. Bankruptcy Code. If the trustee succeeds in undoing, or “avoiding” the transfer, there’s essentially the same result as with any other available debtor asset. The trustee sells that asset and distributes the proceeds according to the same set of priority rules just mentioned above.

Voluntary/Involuntary, Good/Bad Intentions

In the last few blog posts we’ve shown how a preference payment to a creditor can be voluntary or involuntary. That is, you may make that payment freely, with full intention. Or the creditor may force it from you through a garnishment of your paycheck, or some other aggressive collection method. You may be intentionally favoring one creditor over your others, or may have no such intention. All these kinds of payments can qualify as a preference, if they meet some timing and other conditions. The trustee may have a right to “avoid” the payment and make the creditor give up the money.

A so-called fraudulent transfer is one that you do more or less voluntarily. You generally sell or give away your assets by choosing to do so, even if you might wish you didn’t have to. And in spite of the word “fraudulent,” a fraudulent transfer absolutely does not require bad intentions. Innocently selling or giving something away during the two years before filing bankruptcy may be a fraudulent transfer. All it takes is satisfying a number of timing and other conditions.

The Purpose of Fraudulent Transfer Law

This power in bankruptcy to undo a sale or gift is intended to keep the system fair and honest.

By “fair” we mostly mean fair between you and your creditors. Bankruptcy is mostly about debts and assets. In most consumer Chapter 7 cases, all or most of your debts get written off. And you get to keep all of your assets because they are protected, or exempt. But the system still gets to review your assets carefully to determine if you have anything that is not protected, and should be liquidated to pay your creditors. Part of that focus on assets is this power to look back at two years of asset transfers.

But why do “innocent” sales and gifts of assets get included? If the system is trying to discourage keeping assets away from your creditors, if that wasn’t your intention why might your sale or gift still be a fraudulent transfer? It’s because the law in this arena tries to be fair regardless of intention. We’ll show you what this means in the next couple blog posts.

Most Consumer Bankruptcy Cases Have No “Avoidable” Fraudulent Transfers

Let’s keep this all in perspective. There are a number of conditions for a sale or gift to meet to be considered a fraudulent transfer. Most consumer Chapter 7 cases do not involve a trustee trying to undo prior sales or gifts. That’s because in most cases the transfer doesn’t meet the necessary conditions. Or if the conditions are technically met the transfer is not worth for the trustee to “avoid” for practical reasons.

In the upcoming posts we will get into the conditions that create a fraudulent transfer. There are basically two kinds—intentional and unintentional. We’ll start next time with the kind involving the “actual intent to hinder, delay, or defraud” creditors. Section 548(a)(1)(A) of the Bankruptcy Code. 

 

Upcoming Property from a Divorce

December 9th, 2016 at 8:00 am

One special category of future assets in bankruptcy is property from a divorce—either from a property settlement agreement or court decree.  

 

Bankruptcy and Future Assets

Five blog posts ago we started this series on special assets about inheritances and life insurance proceeds. We referred to a special 180-day exception to the otherwise strong rule saying that you focus on assets that you own as of the day that you file your bankruptcy case.

This exception means that assets you acquire by inheritance or life insurance up to 180 days AFTER filing bankruptcy are treated as if you owned those assets at the time you filed your case. Section 541(a)(5)(A) and (C) of the Bankruptcy Code. This means the inheritance or life insurance proceeds could go to your creditors instead of into your pocket.

Property Acquired by Property Settlement Agreement or Decree

Notice how that reference to the Bankruptcy Code on that 180-day exception just now was to subsections 541(a)(5)(A) and 541(a)(C). Well, how about the subsection in between those two: 541(a)(5)(B)?

The 180-day exception applies there as well, this time to property (assets) acquired:

as a result of a property settlement agreement with the debtor’s spouse, or of an interlocutory or final divorce decree…  .

Dealing with Divorce and Bankruptcy at the Same Time Is Complicated Enough…

Both divorce and bankruptcy deal with a lot of the same financial issues, including assets and debts. Divorce often shifts your assets and debts. That’s one reason that it’s often unwise to file bankruptcy right in the midst of a divorce. Bankruptcy, especially Chapter 7 “straight bankruptcy,” has trouble dealing with a moving target, with shifting assets and debts. Divorce creates that complicating moving target.

The 180-Day Exception

Just one of those complications is that you can’t just look at what your assets are when you file bankruptcy. You have to anticipate what else you may acquire through your divorce in the subsequent 180 days.

By Settlement Agreement, Interlocutory Decree, or Final Decree

To be clear, the law doesn’t just cover assets you get from your final divorce decree. It includes prior steps in the process, such as property settlements that you make with your spouse. It may also include court orders resolving just part of your divorce.

Conclusion

So be very careful if you’re in a hurry to get a divorce filed. Don’t make the understandable mistake of thinking that bankruptcy fixates only on what you own at the time of filing.

Also, just because you figure it’ll take a long time to finish your divorce, you might want to wait to start it. That’s because even though you might be fighting about child custody or spousal support for many months, the property settlement of the case or a partial decree on property could happen faster. If any of this happens within 180 days after filing bankruptcy, assets you expected to receive yourself could easily go instead to your creditors.

 

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