Blog
Law Offices of Chance M. McGhee

Call Today for a FREE Consultation

210-342-3400

Archive for the ‘Chapter 7 trustee’ tag

Priority Debts in an Asset Chapter 7 Case

December 2nd, 2019 at 8:00 am

Your Chapter 7 trustee may pay your priority debts—in full or in part—through the proceeds of the sale of your unprotected, not exempt assets.  


Our last blog post was about what happens to priority debts in a no-asset Chapter 7 case. Most consumer “straight bankruptcy” Chapter 7 cases are no-asset ones. This means that the bankruptcy trustee does not take anything from the debtor because everything is protected, “exempt.” The trustee does not take and liquidate any assets, and has nothing—no assets—to distribute to the debtor’s creditors. That’s a no-asset Chapter 7 case.

No-Asset Case Even If Some Assets May Not Be Exempt

To understand how this actually works, sometimes a Chapter 7 case is a no-asset one even when not all assets are exempt. That’s because the bankruptcy trustee has some discretion about whether to collect and liquidate an otherwise unprotected asset. Here are three reasons why he or she may not pursue an asset:

  • The value of the asset, or the amount beyond the exemption, is too small to justify the trustee’s collection efforts. Example: A vehicle worth only a couple hundred dollars more than the vehicle exemption.
  • Finding and/or selling the asset may be too expensive compared to its anticipated value. Example: A debt owed to the debtor by somebody who can’t be located and likely has no reliable income.
  • The asset could be more of a detriment than a benefit to the trustee. Example: real estate with hazardous waste contamination.

Usually your bankruptcy lawyer will be able to reliably predict whether your Chapter 7 case will be an asset or no-asset case. But not always. The trustees have wide discretion about this. Plus before filing your lawyer doesn’t know which trustee will be assigned to your case. So you can’t always know whether a trustee will pursue an asset or not.

Paying Priority Debt through a Chapter 7 Asset Case

If you know that you will have an asset case, you can pay a priory debt through your case.

In our last blog post our main point was that in a no-asset Chapter 7 case you have to pay any priority debts yourself directly to your creditors after completing the case. But in an asset case, the trustee would pay any of your priority debts before any other debts. The trustee collects and liquidates your assets (any not protected by exemptions). From the proceeds he or she then pays your debts, only to the extent there’s money available.

So in the right case you can pay all or part of your priority debt(s) in this way. Often, there only enough money to pay towards the priority debt(s), along with the trustee’s fee. If so, then there’s no money to pay anything to your other, general unsecured debts. This way, the trustee would pay those (priority) debts that you’d have to pay anyway, and nothing to those (general unsecured debts) that bankruptcy would discharge and you’d not have to pay.

For Example

Assume you owe $4,000 to the IRS for last year’s income tax. You also owe $75,000 in medical bills and unsecured credit cards. If you filed a Chapter 7 case in which everything you owned was protected, that would be a no-asset case. The IRS debt is a priority debt that you can’t discharge (legally write off). So you would have to make arrangements to pay it after your Chapter 7 case was over. Most likely the case would discharge the $75,000 in other debts.

But now assume that you have a boat that you no longer want because it costs too much to maintain.  There’s usually no exemption for a boat. So the Chapter 7 trustee takes and sells your boat. Let’s say the boat sells for $5,000. The proceeds of that sale would go to pay your tax debt before your other creditors would receive anything.

Usually a Chapter 7 trustee receives a fee of 25% on the first $5,000 of assets liquidated and distributed. U.S. Bankruptcy Code Section 326(a). That’s $1,250 on the $5,000 boat sale proceeds, leaving $3,750 left over. All of that would go towards the $4,000 IRS debt, leaving a $250 balance owed. The trustee would have no money left over to pay towards your $75,000 in other debts. You would not have to pay any of that yourself because your Chapter 7 case would very likely discharge it. You would only have to pay the not-discharged remaining balance of $250 on the tax debt.

Conclusion

In some circumstances paying a priority debt in a Chapter 7 case is not a bad deal. This is especially true if you have an asset not protected by an exemption that you don’t mind surrendering. Usually you would be personally on the hook to pay a priority debt after your Chapter 7 is finished. So if you surrender a non-exempt asset to the trustee and most of its proceeds go to pay towards your priority debt, that’s a good result.

These situations don’t necessarily fall together as neatly as in the above example. But this option is worth looking at with your bankruptcy lawyer whenever you have a the combination of a non-exempt asset and priority debt(s).

 

Priority Debts in a No-Asset Chapter 7 Case

November 25th, 2019 at 8:00 am

Priority debts are largely unaffected by a Chapter 7 case—it does not discharge them, so you need to pay them after finishing your case.

 

Most Chapter 7 Cases Are No-Asset Cases

Chapter 7—“straight bankruptcy”—is the most common type of consumer bankruptcy case. They are generally the most straightforward, lasting about 4 months start to finish. Usually everything you own is protected by property exemptions. You discharge, or legally write off all or most of your debts. Secured debts like a home mortgage or vehicle loan are either retained or discharged. You either keep the collateral and pay for it, or surrender it and discharge any remaining debt. Bankruptcy does not discharge certain special debts like child/spousal support and recent income taxes.

A “no-asset” Chapter 7 case is one, as described above, in which everything you own is covered by property exemptions. So you keep everything you own (with the exception of collateral you decide to surrender). It’s called a no-asset case because your Chapter 7 trustee does not get any assets to liquidate and distribute to any of your creditors. The trustee just verifies that you have no unprotected assets. He or she does this mostly by reviewing your bankruptcy documents and asking you some simple questions at your hearing. A large majority of Chapter 7 cases are no-asset ones. Your bankruptcy lawyer will tell you if yours is expected to be.

Although Chapter 7 is theoretically a liquidation form of bankruptcy, in a no-asset case there is nothing to liquidate. You lose no assets, and you lose all or most of your debts.

What Happens to Your Special, Priority Debts in a No-Asset Chapter 7 Case?

Yes, what about debts that do not qualify for discharge? There are various types of such debts, although most cases have either only one or two not-discharged debts, or none at all.

Most debts that Chapter 7 does not discharge are what are called priority debts. These are simply categories of debts that Congress has decided should be treated with higher priority than other debts. In consumer cases the most common priority debts are child/spousal support and recent income taxes. See the U.S. Bankruptcy Code subsections 507(a)(1) and (8). (Not to go into the rules here, but many older income taxes are not a priority debt and can be discharged.)

Priority debts generally get paid ahead of other debts in bankruptcy. This is true in an asset Chapter 7 case—where the trustee is liquidating a debtor’s assets.  In fact the trustee must pay a priority debt in full before paying regular (“general unsecured”) debts a penny!

But in a no-asset Chapter 7 case the trustee has no assets to liquidate. So he or she cannot pay any creditors anything, including any priority debts. So, essentially nothing happens to a not-dischargeable priority debt in a no-asset Chapter 7 case.

Dealing with Priority Debts During and After a Chapter 7 Case

However, one benefit you receive with some priority debts is the “automatic stay.” This stops (“stays”) the collection of debts immediately when you file a bankruptcy case. This “stay” generally lasts the approximately 4 months that a no-asset case is usually open. This no-collection period gives you time to make arrangements to pay a debt that is not going to get discharged. So you can start making payments either towards the end of your case or as soon as it’s closed. The hope is that you’ve discharged all or most of your other debts so that you can now afford to pay the not-discharged one(s).

The automatic stay applies to most debts, but there are exceptions. Child/spousal support is a major exception. Filing a Chapter 7 case does not stop the collection of support, either unpaid prior support or monthly ongoing support. (Note that Chapter 13 “adjustment of debts” can stop the collection of unpaid prior support under most circumstances.)

So, with nondischargeable priority debts that the automatic stay applies to, during your case you and/or your bankruptcy lawyer make arrangements to begin paying the debt. With ones that the automatic stay does not apply to, you need to be prepared to deal with immediately.

If neither of these make sense in your situation, consider filing a Chapter 13 case instead. Talk with your bankruptcy lawyer about the advantages and disadvantages of each option. Chapter 13 takes a lot longer—from 3 to 5 years usually. But if you have a lot of priority debt (or secured or any other nondischarged debts), it can really help.

 

Chapter 13 Gives the Most Time to Cure Your Mortgage

July 29th, 2019 at 7:00 am

Chapter 7 provides no mechanism to cure your mortgage. But Chapter 13 does provide a powerful, realistic, and practical way to do so. 

 

Chapter 7 “Straight Bankruptcy” and Chapter 13 “Adjustment of Debts”

Chapter 7 and Chapter 13 are the two main consumer bankruptcy options.

Most Chapter 7 cases only takes a few months—usually 3 to 4 months—from filing to completion. A Chapter 13 case usually takes 3 to 5 years. At first this extra length of time may seem like a disadvantage. However Chapter 13 puts this time to good use, accomplishing things that you can’t under Chapter 7.

Essentially, Chapter 13 gives you the 3-to-5-year period to cure your mortgage, while protecting your home throughout that time.

The Chapter 7 Shortcomings

Chapter 7 leaves you at the mercy of your mortgage lender if you’re behind on the mortgage.

Chapter 7 protects you from the lender for only the 4 months or so that it lasts. (The protection might even be shorter if the lender asks the bankruptcy court for permission to end the protection sooner.) During that time you may be able to work out a “forbearance agreement” with your lender. This agreement nails down the terms for curing your mortgage.

The problem is that you have precious little leverage in this negotiation. If you are not too far behind on your mortgage, your lender may be give you a few months, maybe up to a year, to catch up. But the lender has all the leverage and you have almost none. It could just begin or resume a foreclosure as soon as your Chapter 7 case is over. With that leverage it can make you try to catch up unrealistically fast, requiring huge extra catch-up payments each month. This makes more likely that you won’t succeed in always making the required payments. And at best, if you do make those large payments and do catch up, it’ll be a tough and risky experience.

The Chapter 13 Solution

In contrast, as mentioned above Chapter 13 gives you much more time, and protects your home in the meantime.

Instead of the catch-up payment amount being imposed on you, your personal realistic budget determines the amount. The payments can be stretched out over as much as 5 years. You may even be able to delay or lessen these catch-up payments if you have other even more urgent debts to pay. Also, if your circumstances change midstream, you’d likely be able to adjust the payments.

These and other advantages effectively lower the catch-up payments, making more likely that you’ll successfully cure the mortgage and keep your home.

Doing Your Part

You can rather easily lose the multi-year protection of Chapter 13 if you don’t fulfill some important obligations. To maintain the protection you have to:

1. Keep current on your court-approved Chapter 13 payment plan. Your catch-up payments are incorporated into the single monthly payment you make towards virtually all your debts. Not paying this to the Chapter 13 trustee each month gives your mortgage lender cause to ask permission to foreclose. It also gives cause for your case to be thrown out altogether. 

2. Keep current on the regular monthly mortgage payments. Chapter 13 gives you the means to slowly cure your arrearage. Falling further behind in the middle of your case seriously jeopardizes your case.

3. Pay your homeowner’s insurance on time. Don’t let your insurance lapse. That really scares your mortgage lender (and should scare you, too). Your lender would likely “force-place” its own insurance (which protects it but not you). It would then make you pay the exorbitant cost of this insurance, putting you that much further behind. This is also an independent basis for it to ask permission to foreclose.

4. Pay the property taxes. Falling behind on property taxes also gives the mortgage holder a separate basis for asking the bankruptcy court for permission to foreclose. The budget you work out with your bankruptcy lawyer will include money for these taxes, to prevent this from happening.

 

Protecting Your Home Equity through Chapter 7

July 1st, 2019 at 7:00 am

You can protect the equity in your home if the amount of equity is no more than the homestead exemption applicable to residents of your state. 


 

Our last two blog posts outlined 15 separate ways that bankruptcy can protect your home now and/or in the future. We’ll be explaining each one of these ways in 15 separate blog posts. Here is the first one—protecting present and future equity in your home through Chapter 7 “straight bankruptcy.”

Property Exemptions in General in Bankruptcy

When you file a bankruptcy case, your assets are protected through a set of “exemptions.” “Exemptions” are categories of your assets that are protected for you from your creditors. Each category usually has maximum dollar limits. (See Section 522 on “Exemptions” in the U.S. Bankruptcy Code.)

Exemptions work somewhat differently in Chapter 7 and Chapter 13. Focusing today on Chapter 7, this is a “liquidation” form of bankruptcy. This means in theory that the Chapter 7 trustee takes—liquidates—anything you own not fitting within an exemption. 

However, the practical effect of exemptions is that most people filing under Chapter 7 get to keep everything they own.

The Homestead Exemption

The homestead exemption determines how much equity in your home you can protect from your creditors. As long as the amount of equity is no more than the homestead exemption amount, your home is safe in a Chapter 7 case.

As a quick example, assume your home is worth $300,000, you owe $265,000, so you have equity of $35,000. If the homestead exemption applicable to your state is $35,000 or more, your home is protected.

This means that your Chapter 7 trustee can’t take the home and sell it to pay the equity over to your creditors.

If you have too much equity, you wouldn’t be filing under Chapter 7. Not if you want to keep your home. See next week’s blog post about preserving home equity that’s more than your homestead exemption through Chapter 13.   

Federal vs. State Exemptions

Bankruptcy law provides a set of federal exemptions, while each state has its own set of exemptions as well. All have a homestead exemption. Can you use either the state or federal homestead exemption? If so, which should you use?

At the outset, since bankruptcy is a federal procedure why is state exemption law applicable at all?                                                    

The U.S. Constitution made bankruptcy a federal procedure to make it uniform throughout the country.  See Article I, Section 8, Clause 3 of the Constitution. But there are many areas in bankruptcy where state laws apply. One such broad area is property law. In an interesting compromise, Congress gave each state the power to require its residents to use that state’s set of exemptions instead of the federal ones. Section 522(b)(2) of the Bankruptcy Code.

So 31 states have decided you must use the state law exemptions. In the remaining 19 states you can use either the state or federal bankruptcy exemptions. Since the list is shorter these 19 states that give you a choice 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.

The Amount of Your Homestead Exemption

The homestead exemption amounts vary greatly state to state. For example, Kentucky’s homestead exemption protects only $5,000 in value or equity for an individual homeowner. On the opposite extreme, Nevada’s homestead exemption is $550,000. Plus a number of states—including Texas and Florida– have no dollar limit at all (although do have acreage limitations).

This can get quite complicated. For example, Kentucky residents can chose to use the federal homestead exemption instead of the modest state exemption.  But in all states you can’t pick and choose between the various federal and state exemptions. Section 522(b)(1) of the Bankruptcy Code. If you are in a state where you can use the federal homestead exemption, you can’t use any of the state exemptions that might be better for another category of assets. In the example of Nevada and Florida residents, who have such a large or unlimited homestead exemption, if they use that advantageous state homestead exemption they must use their state’s exemptions even if the federal ones may be better in other property categories.

Also, you can’t move to a new state and immediately claim that state’s generous homestead exemption. You must be “domiciled” in your new state for 730 days, or two years. Section 522(b)(3) of the Bankruptcy Code

Finally, your homestead exemption might be limited by a federal cap on the amount you can clam if you bought your home within 1,215 days (3-years and 4 months) before filing bankruptcy. Section 522(p) of the Bankruptcy Code. Effective April 1, 2019 (and for 3 years thereafter), this cap amount is $170,350. This is relevant only if your state homestead exemption is larger than this relatively large amount.

Need Legal Advice

There are other potential complications, depending on your situation. For example, what qualifies as a “homestead” to which you can apply the homestead exemption? What if you’re not on the title but instead buying a home on contract? What about leasehold interests you may have?  What happens if you own the property with your spouse, or with somebody else?

Your homestead exemption situation could well be very straightforward. But it may not be, even when it seems like it is. You need to get legal advice about this. It would be one of the first topics you would cover with your bankruptcy lawyer, and hopefully get reassured about.

Bankruptcy—including Chapter 7—can be a great way to protect present and future equity in your home. But it’s crucial to know for sure which homestead exemption applies to you, and whether it will definitely protect your home.

 

An Example of a “Preference”

December 10th, 2018 at 8:00 am

A “preference” makes more sense when you see an example. Here’s one. This also helps explain how to avoid creating one. 

 

Last week we explained why paying a creditor before filing bankruptcy could cause problems during bankruptcy. That’s especially true if the creditor you pay is one that you have personal reasons to favor. We explained the circumstances in which such a payment might possibly be considered a “preference,” or a “preferential payment.”  If so, your favored creditor could well be required to return the money you paid, except not to you but rather to your bankruptcy trustee, for distribution to your creditors in general.

We ended last week saying we’d next give you an example of a preferential payment made during the holidays, and practical ways to avoid it.

Our Holiday Example

Imagine that you owe your sister $3,000 for loaning you this money in 2016 to pay your mortgage (or rent). Nothing was put in writing, and you didn’t have to pay interest. But you and your sister agreed that you had to pay it back. Now she’s unexpectedly getting a divorce and she really needs the money. You’re planning on filing bankruptcy early in 2019. You’ve stopped paying most of your other creditors and are making extra money from a part-time job during the holidays. So you now have the $3,000 to pay her back.  

Here’s what would likely happen if you paid her now and then filed a bankruptcy case within a year of doing so.

A month or two after filing bankruptcy the bankruptcy trustee would very likely demand that your sister pay $3,000 to the trustee.

The $3,000 would likely be considered a preferential payment because it was:

  • made within 365 days before the bankruptcy filing
  • to an “insider,” which includes a “relative” (or within 90 days NOT to an “insider”)
  • while you were “insolvent”—essentially had more debts than assets
  • resulting in the sister getting more than she would in a Chapter 7 distribution of your assets  (usually just meaning more than getting nothing)

Assuming the payment meets these requirements of a preference, if your sister didn’t pay the bankruptcy trustee the demanded $3,000 the trustee would likely sue her to make her pay. Once the trustee got that $3,000, it would be divided among your creditors according to a set of “priority” rules. Your sister may receive nothing from this distribution, or likely only a small portion of the $3,000 you owed. Your effort at helping her would likely have seriously backfired.

Avoiding this Unhappy Result

You can avoid this preferential payment problem simply by not paying your sister anything during the year before filing bankruptcy. (This includes either money or anything else of value.)

Instead talk with your bankruptcy lawyer about how to best protect the $3,000 that you’ve scraped together. And then pay your sister after your bankruptcy case is filed. If you’re filing a Chapter 7 “straight bankruptcy” case, that may mean a delay of only a few weeks.  

If you’ve already made the payment to your sister discuss this as soon as possible with your lawyer. If may or may not be possible to undo this payment. If so, that may solve the problem. If not, it may make sense to wait for a year to pass from time of the payment to your filing.  (Or you may need to wait only 90 days if the person you paid does not qualify as an “insider.”)  Either way, in some circumstances it may not make sense to wait. Your lawyer will help you weigh your options.

Finally, what may seem like a preferential payment may in fact not be one. For example, if instead of paying your sister you paid your ex-spouse to catch up on a child support obligation, there’s a good change that would not be a preferential payment.

So again, talk with your lawyer right away if you think you may have made a preferential payment. Or preferably do so before you pay a creditor, in order to prevent doing what may not be in your best interest.

 

“Preferences” Around the Holidays

December 3rd, 2018 at 8:00 am

Do you feel like you should pay on or pay off a certain debt now, even though you’re behind on all your debts?  It may be dangerous to do so. 

 

Last week we explained how giving a significant gift before bankruptcy could cause problems during bankruptcy. This also applies to selling something for much less than it is worth. Such a gift or sale might possibly be considered a “fraudulent transfer.”

A similar problem could arise from paying a creditor before you file bankruptcy. That’s especially true if it’s somebody you want to favor or maybe don’t even see as a regular creditor. This payment might possibly be considered a “preference,” or a “preferential payment.”  This is today’s topic.

Your Desire and Ability to Pay a Special Creditor

Especially around this time of year you may be extra motivated to pay on or pay off a special debt. A relative, or a friend, may really need of the money. He or she may be pressuring you to pay.

You might be thinking about filing bankruptcy and you don’t want it to affect this person. So you pay him or her off thinking that would help. Or you do so because you don’t want the person to know about your bankruptcy, for whatever personal reason.  

Besides wanting to, you may be able to pay on a special debt this time of year more than usual. For many people because of the expenses of the holidays money is especially tight. But, as mentioned a couple weeks ago:

The month of December is the month that people receive more income than any other month of the year. [F]or at least the past 9 years U.S. personal income was the highest in December… .

You may be getting a bonus from work or more income from working extra hours or part-time job during the holidays. So you might be able to pay a special debt now more than at any recent time.

So you may have the desire and ability to pay a debt now, before filing bankruptcy. But it may not be a smart thing to do.

What Makes a “Preference”?

If during the 365 day-period BEFORE filing a bankruptcy case you pay a creditor more than you are paying at that time to your other creditors, then AFTER your bankruptcy is filed that favored creditor could be forced to surrender to your bankruptcy trustee the money that you’d paid to this creditor earlier. See Section 547(b) and (c) of the U.S. Bankruptcy Code. 

This one-year look-back period is shortened to only 90 days for creditors that are not “insiders.” The Bankruptcy Code defines “insiders” basically as relatives and business associates, but the definition is open-ended. See Section 101(31). So it could include friends and just about anybody that you have a personal reason to favor. Your bankruptcy lawyer will advise you whether a potential preferential payment was to an insider or not.

Your favored creditor could be required to return the money (or other form of payment) that you’d paid. The money would usually not be given to you but to your bankruptcy trustee. The trustee would then distribute it among your creditors.

The result: instead of satisfying your favored creditor as you’d intended, you could have an unhappy one. This is not.

What’s the Point of All This?

Preference law is related to one of the most basic principles of bankruptcy—equal treatment of legally similar creditors. People or businesses which are financially hurting must be discouraged from favoring any of their creditors before filing bankruptcy. Otherwise they would—the theory goes—pay all of their last money or other resources to their favored creditors, leaving nothing for the rest of the creditors. Under preference law, if they do so within the 365-day/90-day look-back periods, those payments made to the favored creditor could be taken back from that creditor. This disincentive is supposed to make the situation fairer to all the creditors.

“Preferences” Can Be Frustrating, But They’re Avoidable

“Preferences” are relatively rare problems in consumer bankruptcy cases, partly because they are relatively easy to avoid. Next week we’ll give you a scenario showing a potentially preferential payment made during the holidays, and practical ways to avoid it.

 

Fraudulent Transfers Around the Holidays

November 26th, 2018 at 8:00 am

Giving a gift, including selling for much less than an asset is worth, may be a fraudulent transfer—treated as hiding assets from creditors.

 

Most people filing bankruptcy have neither a need nor the desire to hide anything from their creditors. There’s no need because most people’s assets are already protected through state and federal laws. There’s no desire because most people are honest and want to follow the law.

Yet anybody considering bankruptcy should still have some understanding of the law of “fraudulent transfers.” That’s because it could cause you problems even if you thought you were being honest and fair. As you’ll see this may more likely happen during the gift-giving holiday season.

“Fraudulent Transfers” Explained

A “fraudulent transfer” is essentially a debtor giving away—transferring—an asset to avoiding giving creditors that asset’s value. This can be done with bad intentions, but also without any such intentions.

If you give away something (for example, as a holiday gift), or sell something for much less than it’s worth, then under certain circumstances your creditors could require the recipient to surrender it to the creditors. That would usually not be a good result because you’d prefer that the person be able to keep your gift.

The gift or sale in a “fraudulent transfer” can be challenged in either state courts or bankruptcy court. In a bankruptcy case the bankruptcy trustee would act on behalf of the creditors to “avoid” (undo) the transfer.

The Two Kinds of “Fraudulent Transfers”

There are two kinds of fraudulent transfers.

The one based on “actual fraud” requires the actual intent to harm a creditor or creditors. It occurs when a debtor gives a gift or makes a transfer “with actual intent to hinder, delay, or defraud” one or more creditors. Section 548(a)(1)(A) of the U.S. Bankruptcy Code.

The one based on “constructive fraud” does not require the actual intent to harm a creditor. It occurs when a debtor gives a gift or makes a transfer receiving “less than a reasonably equivalent value in exchange, in which the debtor “was insolvent on the date that such transfer was made.  . .  , or became insolvent as a result of such transfer.” Section 548(a)(1)(B) of the Bankruptcy Code. Although the debtor does not intend to defraud anybody, the transfer can be undone under certain circumstances.

Legal and Practical Considerations

Most people filing bankruptcy will not be accused of a fraudulent transfer for a number of reasons:

1) Most people simply don’t give away their assets leading up to filing bankruptcy.

2) Gifts to charities are largely exempt.

3) The bankruptcy system doesn’t care about minor gifts or transfers.

4) Even in circumstances that a transfer could be challenged, the trustee has to consider the cost and practicality of undoing the transfer.

1) Debtors Don’t Generally Give Away Assets

Most people considering bankruptcy usually need pretty much everything they own. So they aren’t going to be giving it away or selling it for less than it’s worth.

Furthermore, the assets that people own when filing bankruptcy are usually fully protected. So there’s no motivation to transfer them away.  These protections are usually through property “exemptions,” or through the special advantages of the Chapter 13 “adjustment of debts.”

2) Gifts to Charities Are Essentially Exempt

The Bankruptcy Code creates a big exception for transfers made “to a qualified religious or charitable entity or organization.” Charitable contributions are exempt if they do “not exceed 15 percent of the gross annual income of the debtor.” The amount of contributions can total an even higher percentage “if the transfer was consistent with the practices of the debtor.” Section 548(a)(2).  

3) Minor Gifts Are Not a Problem

The bankruptcy system doesn’t worry about relatively minor gifts or transfers. This effectively means a gift or gifts given over the course of two years to any particular person valued at $600 or less. The Bankruptcy Code itself does not refer to that threshold amount. But the Statement of Financial Affairs for Individuals, which is one of the official documents you and your bankruptcy lawyer prepare and file at court does so.

This document includes the following question #13:

Within 2 years before you filed for bankruptcy, did you give any gifts with a total value of more than $600 per person?

The next question (#14) is very similar:                                            

Within 2 years before you filed for bankruptcy, did you give any gifts or contributions with a total value of more than $600 to any charity?

4) Cost and Practicality of Avoiding the Transfer

Even when a gift or other transfer arguably qualifies as a “fraudulent transfer,” the trustee has to seriously consider the costs in attorney fees and other expenses to try to undo that gift or transfer. At the very least the costs have to be weighed against the amount likely to be gained for the creditors.

This is particularly true when there’s a meaningful risk that the transfer would not qualify as a “fraudulent transfer.” Or the transfer may qualify but the transferee has disappeared or a judgment against him or her is uncollectable.

 

An Example Why Passing the Means Test May Be Easier in 2018

November 19th, 2018 at 8:00 am

Filing bankruptcy before the end of December may help you qualify for Chapter 7 bankruptcy. Here’s an example showing how this could work.  

 

The month of December is the month that people receive more income than any other month of the year. According to the federal Bureau of Economic Analysis (part of the U.S. Department of Commerce), for at least the past 9 years (2009 through 2017) U.S. personal income was the highest in December than in any other calendar month.

This may well be true for you personally. You may work a part-time seasonal job this time of year to help make ends meet. You may be getting a few larger paychecks because of more work hours or overtime. Or you may be fortunate enough to get a holiday or year-end bonus.

Last week’s blog post explained how filing bankruptcy during December can be smart if you receive extra income that month. It can help you qualify for Chapter 7, and avoid being forced into a 3-to-5-year Chapter 13 case. Today we lay out an example to show how this would work.

The Example

Let’s assume that the median income amount for your family size in your state is $64,577.

(That’s the current amount for a family of 3 in Kentucky. You can find the median income amount applicable to you on this chart. It’s from the means testing webpage of the U.S. Trustee Program. The chart is current for bankruptcies filed starting November 1, 2018, and is updated about three times a year.)

Assume that your regular family monthly gross income is $5,000, which would give you an annual income of $60,000. That’s less the median income amount of $64,577 provided above. So you’d think that you’d easily pass the means test.

But let’s also assume that you and/or your spouse were to receive an extra $2,500 during December. This money could be from a seasonal job, overtime, a bonus, or just about any other source.

Filing Bankruptcy During December

What would happen here if you filed a Chapter 7 bankruptcy case during December? The income that would count for the means test would be what you received during the six full calendar months before the date of filing. You don’t count anything received in December; only income during June through November counts.  That would be 6 months of $5,000, or $30,000; multiply that by two for an annual income of $60,000.  

Since $60,000 is less than the $64,577 applicable median family income amount, you’d handily pass the means test. You’d qualify to file a Chapter 7 case.

Waiting to File Bankruptcy After December

If instead you tried to file a Chapter 7 case in January, your income under the means test would be higher. The pertinent 6-month full calendar month period would now be from last July through December.  On top of the usual $5,000 income for 6 months—$30,000—you’d add the extra $2,500 money received in December. So the 6-month total would be $32,500. Multiply that by two for an annual income of $65,000.

Since $65,000 is more than the $64,577 applicable median family income amount you’d not immediately pass the means test. You may not qualify for filing a Chapter 7 case. Instead of likely being able to discharge (legally write off) many or possibly all of your debts within about 4 months you may be forced to pay on them for 3 to 5 years in a Chapter 13 case.

Having Income More Than Median Family Income

Even in this scenario of too much income, there’s a chance you could still pass the means test and qualify for Chapter 7. You’d complete the very complicated 9-page Chapter 7 Means Test Calculation form. Then if your “allowed expense deductions” leave you with too low of “monthly disposable income” you’d still pass the means test. (Whether your “monthly disposable income” is low enough turns on a formula comparing that amount to the amount of your “total nonpriority unsecured debt.”) Or you might also qualify for Chapter 7 by having expenses that qualify under “special circumstances.”

But these alternative ways of trying to qualify for Chapter 7 are much riskier than simply having less income than your applicable median family income amount. Our example above shows how to accomplish this with smart timing. You may be able to do the same by simply filing your case in December, or in whatever month would be most favorable for you.

 

The Surprising Benefits: Resolving the “Preference” Problem through Negotiation

April 23rd, 2018 at 7:00 am

Prevent your Chapter 7 trustee from requiring a relative or friend to return your pre-bankruptcy payment by paying the trustee yourself.  

 

Our blog post two weeks ago introduced an uncomfortable problem: preference payments to a friendly creditor. (Please read that blog post before reading this one.) Then last week we discussed two possible solutions to this problem. Today we discuss the first of two other solutions.

The First Two Solutions

One way to avoid this problem is simply to wait long enough so that enough time passes from the time of your payment to your favored creditor to the time you file your Chapter 7 bankruptcy case. That’s because a payment is considered preferential only if you paid it within a specific time period before your bankruptcy filing. That time period is only 90 days, or one year if the payment was to an “insider.” If you file your case after the pertinent time period has passed, the payment is no longer a preference. You’ve avoided the problem altogether.

The second way to solve the problem is for your bankruptcy lawyer to convince your Chapter 7 trustee not to pursue the preferential payment. That is, there are circumstances when it’s not cost-effective for the trustee to make your payee pay it back. Either the amount at issue is too small or the person you paid can’t be forced to disgorge the money.  

But what if neither of these would work? You couldn’t wait long enough to file your bankruptcy case. Or the trustee definitely intends to pursue your payee for the preferential payment. What other options do you have? Here’s a likely solution.

Offer to Pay the Trustee a Reduced Amount Yourself

A Chapter 7 trustee is required by law to gather whatever the law allows him or her to collect in your case. However, in most consumer Chapter 7 cases the trustee collects nothing—your case is called a “no asset” case. That doesn’t mean you have no assets. It means that all your assets are protected (“exempt”), AND the trustee has no right to anything else. On that second point, most of the time there are no preferential payments for the trustee to pursue.

But we’re assuming here that there IS a preferential payment that the trustee has decided to pursue. Let’s say you very much do not want the trustee to do that. You don’t want the trustee to require the person you paid earlier to now pay that money back to the trustee.

So as we said in the subtitle, you could instead offer to pay the trustee that same amount of money yourself.

Why Would You Want to Pay the Trustee Yourself?

Why in the world would you want to do that? You would if it was the best option for you.

Assume that you have very strong feelings against your prior payee being required to pay back the money you’d paid. Maybe you don’t want that person to even know about your bankruptcy filing. You certainly don’t want the bankruptcy trustee to tell him or her now to give the money you paid back to the trustee. You want to do anything to protect that person.

There’s also a good change that if the trustee did make the person pay the money, you’d have to pay the person again. You may well feel a moral obligation to make the person whole, after the trustee makes him or her to give up what you’d previously paid. If so, then you instead just paying the trustee would cost you the same while avoiding the trustee harassing your prior payee.  

Also, there’s a good chance paying the trustee yourself could save you money. There are costs and risks for the trustee in pursuing a preferential payment. If you pay the trustee yourself that would avoid those costs and risks. So the trustee may well be willing to accept less money—the amount it would have received from your payee minus the avoided costs.

Why Would the Trustee Take Your Money Instead of Your Payee’s?

The trustee doesn’t usually care where he or she gets the money from a preferential payment. Whether it comes from your payee paying the money back, or from you, money is money. The trustee can fulfill his or her responsibilities regardless where the money comes from. So, trustees generally are fine with you paying to avoid the trustee shaking down your payee.

However, that’s not always true. For example, most debtors don’t have the amount of money required payable in a lump sum. Often trustees are willing to let you pay the agreed amount in monthly payments. But the full amount has to be paid off relatively quickly. If the trustee has reason to think that money would come quicker from your payee, the trustee may just decide to get it from him or her instead.

Talk with your bankruptcy lawyer to find out the possibilities under your circumstances.

When Is Paying the Trustee Not a Good Idea?

The whole point of this effort is to protect the person you paid earlier. But there are various situations in which this goal does not apply.

You may not want or need to protect this person. You may not care that the trustee makes him or her pay back the money, for emotional or financial reasons. Frankly, you may have had a falling out with the person. Or, he or she may have plenty of money so that paying back the money may not hurt at all.

You may also not need to protect the person because the law protects him or her already.  He or she may have a valid legal defense to a trustee preference action. Bankruptcy preference law is quite complicated. Your bankruptcy lawyer will ask the appropriate questions to determine whether the person you paid may have a defense.

Your lawyer will also discuss whether the person may not need to pay the trustee for other practical reasons. For example, the amount at issue may simply be too small, or the person may be effectively “judgment-proof.” If so, you’d be wasting your money by paying the trustee yourself.

 

The Surprising Benefits: Solving an Uncomfortable “Preference” Problem

April 16th, 2018 at 7:00 am

A preferential payment to a relative or friend can turn very uncomfortable. But there are some good solutions. One should work for you.

 

Last week’s blog post introduced an uncomfortable problem: preference payments to a friendly creditor. (If you haven’t already please read that one before reading further here.)

The Solutions

We ended that blog post by listing and giving short descriptions of 4 likely practical solutions. We explain the first two of them today and the other two next week.

1. Wait to File Until after the 1-Year or 90-Day Preference Look-Back Period:

There’s one very simple way to avoid having money you paid to a favored creditor turn into a problematic preference.  Wait to file your bankruptcy case long enough so that enough time passes since that payment. Then it’s no longer a preferential payment that the trustee can cause you problems with.

The preference period is only 90 days with most creditors, but a full year with “insider” creditors. Without getting unnecessarily technical, there’s a good chance that anybody you’d have a personal reason for paying is an insider. See Section 101(31) of the U.S. Bankruptcy Code for the statutory definition of insider. But note that this is not a complete list. It says what the term “includes,” but courts have made clear that others not on the list could be insiders. For example, also included could be friends or others who’d you’d have a personal reason to favor over other creditors.

Whether the creditor is an insider or not, the payment you made is not a preference if more than 90 day/1 year has passed when your bankruptcy lawyer files your case. Then your bankruptcy trustee would have no power to require your payee to pay back your payment.

We are well aware that waiting is not a simple solution if you are in a big hurry to file your bankruptcy case.  Waiting even a few days may not be at all easy if your paychecks are being garnished or you’re under other similar collection pressure. Or waiting may even be totally inappropriate if your home would be foreclosed or your vehicle repossessed in the meantime.  

However, there are many situations where you would not be a huge hurry to file your case. Then waiting would be worthwhile. This may especially make sense if you are getting close to 90 day or 1-year mark since your preferential payment. So, at least look into whether you should just wait long enough to avoid the problem altogether.

2. Persuade Trustee Not to Pursue the Preferential Payment:

Just because there was a preferential payment within the look-back period, doesn’t mean it’s worth for the trustee to pursue. There are many circumstances in which you could help convince him or her to let it alone.

First, the simplest situation is if so little money is at issue that it’s not worth the bother. It takes some effort for a trustee to force a preferential payee to pay back the money. There is also a certain amount of paperwork and effort to divvy up the money among your creditors.  If the payment you made is no more than several hundred dollars most likely your trustee will shrug it off. (This is similar to trustees generally not chasing an unprotected (“nonexempt”) asset: if it’s only worth a few hundred dollars it’s usually not worth collecting and distributing.) Talk with your bankruptcy lawyer about what that unstated threshold dollar amount would  be in your area.

Caution: IF the trustee is already collecting assets in any form in your case, this threshold amount consideration likely goes out the window. If the trustee already has to liquidate anything and distribute money to creditors, he or she will usually be inclined to add to that amount by chasing down your preferential payee.

Second, there are many circumstances where forcing a preferential payee to repay the money would be difficult for the trustee. Your payee may have very little in assets or income reachable by the trustee, so it would likely take a very long time to collect it. Or the payee may have a valid defense. Especially if the amount at issue is relatively small (although above the above threshold), the trustee may decide such preferential payments are not worth chasing.

Third, there are other circumstances where the trustee simply could not collect from your payee at all. Your payee may have disappeared and can’t be located. Or your payee may be legally “judgment-proof”—have no assets or income reachable by the trustee. Helping the trustee learn the true facts along these lines could induce him or her make a sensible decision to abandon the preferential payment.

 

Call today for a FREE Consultation

210-342-3400

Facebook Blog
Back to Top Back to Top