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Archive for the ‘Chapter 7 trustee’ tag

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.

 

The Surprising Benefits: A “Preference” Payment to a Relative or Friend

April 9th, 2018 at 7:00 am

A preferential payment to a favored creditor—a relative or friend—can be a problem, but one which usually has a workable solution. 

 

Our last two blog posts have been about one of the more confusing parts of bankruptcy: the law of preferences. This law says that if a creditor takes or receives money from you within the 90 days before you file your bankruptcy case, the creditor may need to pay it back. A creditor would not pay that money to you but rather to your Chapter 7 bankruptcy trustee. The trustee would then pay out that money to creditors based on a priorities schedule in bankruptcy law.

Our last blog post was about how that priority schedule could result in most of that money going to a creditor you need and want to be paid. One example we used was a recent income tax debt. That can’t be discharged (written off) in bankruptcy. So preference law could result in the trustee getting some money back from a creditor you don’t care about to pay the tax debt so you don’t have to.

Preference Payments You DON’T Want Undone

But preference payments don’t just involve creditors you don’t care about. You may well not lose sleep over a trustee forcing a credit card company to return $1,000 it garnished from you on the eve of your bankruptcy filing. But what if you’d paid $1,000 on a personal loan to your brother or grandmother 6 months before filing bankruptcy? You’d promised to pay him or her back as soon as you got your tax refund, for example. So you did pay the $1,000. He or she really needed the money, and you felt huge emotional and ethical pressure to pay it. It was the right thing to do.

But now you hear from your bankruptcy lawyer that a Chapter 7 trustee could force your brother or grandmother to pay back that money. You feel that would be crazy, and wrong. Your brother or grandmother has long ago spent the $1,000 you paid on the loan. It would really be hard on them to now turn around and pay $1,000 to your trustee. In fact maybe one reason you paid off this debt was so that he or she would not be involved in your anticipated bankruptcy case. You may prefer that your relative not find out about you having to file bankruptcy. You can’t think of anything worse than he or she getting a demand from the trustee to pay the $1,000. This prospect may well turn you off about filing bankruptcy altogether.

The Solutions

However, this problem has a number of likely practical solutions. We’ll list them here and give brief explanations. Then next week we’ll expand on them to make sure they make sense.

1. Wait to File Until after the Preference Look-Back Period: With “insiders”—relatives and potentially anybody close to you–the look-back period is a full year before filing. It’s not just 90 days back, as it is with non-insiders. Regardless, especially if you are getting close to a year since your preferential payment, consider waiting long enough to avoid the problem altogether.

2. Persuade Trustee Not to Pursue the Preferential Payment: Your relative or other favored person that you paid may genuinely be unable to pay the $1,000 or whatever you paid. He or she may have no legally reachable income or assets. The trustee won’t want to waste money to pay his or her lawyer to fruitlessly pursue a preferential payment.  

3. Offer to Pay the Trustee a Reduced Amount Yourself: The trustee will usually not care where the preference money comes from—from the relative or other creditor who got your money, or anywhere else. So you could offer to pay that $1,000 or whatever that sum of money yourself. The trustee may even take monthly payments from you. Also, he or she may accept less than the full preference payment amount, subtracting what it would have cost in attorney fees and other costs for him or her to get it from your relative.

4. File a Chapter 13 Case to Prevent Pursuit of the Preferential Payment: Chapter 13 “adjustment of debts” often provides a very good solution. It works particularly if 1) you need to do a Chapter 13 anyway, 2) the preferential payment is large, and/or 3) none of the above solutions will work.

Next Time…

We’ll explain these four in our next blog post. The bottom line until then: a preferential payment to a relative and other favored creditor can be a scary problem, but it’s one that usually has a very sensible practical solution.

Surprising Bankruptcy Benefits: Make Creditors Return Your Money

March 26th, 2018 at 7:00 am

Bankruptcy doesn’t just stop garnishments and other collections. Sometimes you can make a creditor return money it recently took from you.

 

Bankruptcy’s “automatic stay” is one of the most immediate and powerful benefits of bankruptcy. It immediately stops almost all creditor collection actions against you, your income, and your assets. See Section 362 of the U.S. Bankruptcy Code.  

But it does not go into effect until the moment you file your bankruptcy case. What if a creditor garnishes or otherwise gets your money right BEFORE you file bankruptcy?

Sometimes the creditor can be forced to give up such recently received money as well.

The Law of Preferences

This happens through the surprising and easily misunderstood law of “preferences.”

This law says that if a creditor takes money (or some other asset) from you within the 90 days before you file your bankruptcy case, the creditor may need to pay it back. It has to do so if keeping that money results in that creditor receiving a greater share of its debt than the rest of your creditors would get out of your bankruptcy case. See Section 547(b) of the Bankruptcy Code.

That second condition would often be met, especially in a consumer Chapter 7 “straight bankruptcy case.” So, most money grabbed by an unsecured creditor within 90 days before your bankruptcy filing can be “avoided.” The creditor can be forced to return it.

For example, let’s say an aggressive unsecured medical debt collector garnishes your checking account. You’ve just deposited your paycheck and the creditor grabs $2,000. You owed $5,000 so this creditor just got paid 40% of its debt. Then you file your Chapter 7 case a day after the creditor garnished your money. Assume you owe a total of $75,000 in general unsecured debts. If in that Chapter 7 case—as in most—all your assets were “exempt” (protected), those debts would receive nothing. So, the garnished $2,000 would be a preferential payment that could be reversed. That’s because it happened within 90 days before filing and resulted in the creditor getting 40% instead of nothing.

(There are a number of other conditions and exceptions to a preference, but they often don’t apply to consumer cases. However, preference law can sometimes get quite complicated. You need to talk with your bankruptcy lawyer to find out if you really have an avoidable “preferential payment.”)

The Principles behind Preference Law

Preference law serves two principles important to bankruptcy.

First, bankruptcy law tries to discourage overaggressive creditors. The risk that a creditor would have to return money grabbed just before the debtor files bankruptcy is supposed to be a disincentive for such a money grab.

Second, a lot of bankruptcy law focuses on maintaining fairness among creditors. Similarly situated creditors should be treated the same. No playing favorites unless there is a legally appropriate reason to do so.  (On such reason would be if the debt is secured by collateral).

This fairness means that legally similar creditors need to be treated the same not just during your bankruptcy case but also shortly before the filing of your case. The period of fairness extends a bit before the bankruptcy filing so that overly aggressive creditors aren’t favored. Any available money or assets are spread among all the creditors more evenly and thus more fairly.

A Preference Benefitting You

It’s all well and good to punish a creditor for grabbing money from you shortly before you file bankruptcy. But what good does it do you if that money just goes to your Chapter 7 trustee?  The trustee would just distribute that money among your other creditors, right?

Generally, yes. But in many circumstances this preference money helps you very directly. Next time we’ll show you how.

 

The Means Test is Based on Timing

October 6th, 2017 at 7:00 am

Most people easily pass the means test based on their relatively low income. Timing plays a huge role in calculating your income.   


The Means Test

To file and complete a Chapter 7 “straight bankruptcy” case you have to qualify for it. The main hurdle in qualifying is what’s called the “means test.”  That is, to qualify for Chapter 7 you have to show that you don’t have too much “means.”

You do that mostly through your income. The start, and for most people the end, of the means test involves comparing your income to a set median income amount. If your income is no more than median income amount for your family size in your state, you pass the means test.                  

Being able to file a Chapter 7 case by passing the means test is usually very important. That’s because if you have more “means” (income) than you’re allowed, you usually have to file a Chapter 13 case instead. That involves a 3-to-5-year payment plan, instead of the 3-4-month Chapter 7 procedure. Chapter 13 is great in the right circumstances. It has great tools unavailable under Chapter 7. But if you just need the quick relief of Chapter 7 being forced instead into a Chapter 13 case is a serious setback.

The Timing Focus of the Means Test

As we said above, the easiest way to pay the means test is for your income to be no larger than the published “median income” amount for a family of your size in your state. If your income is no more than that then right away you’ve passed the test. You’ve overcome the biggest qualification for filing a Chapter 7 case.

But your income for purposes of the means test is not calculated in any way you might think. In particular the timing aspect of how your income is calculated is unusual.

Your income for purposes of the means test is not based on your income for the previous calendar year, or prior 365 days or 12 months. It’s not based on any kind of annual basis. Instead it’s based on your income of the six full calendar months prior to the filing of your case.

  • For example, if you and your bankruptcy lawyer file your case during any day in October 2017, the pertinent prior-six-full-calendar-month period is from April 1 through September 30, 2017. After adding up the income received during that six-month period multiply it by two for the annual amount.
  • Your income for the means test is not just your “taxable income.” Instead include just about every bit of income or money you receive from all sources during that period of time. This includes irregular sources of money such as child and spousal support payments, insurance settlements, unemployment benefits, and bonuses. However, exclude all types of social security-based income.

The Median Income Amount for Your Family Size and State

The last step is to compare your income amount as you just calculated to the median income for your state and your size of family. You can find that median income amount in the table that you can access through this website. (This median income information gets updated every few months so be sure to use the current table.)

Conclusion

If your income, as calculated in this distinct way, is no more than the median income for your state and family size, then you’ve cleared the means test hurdle! You can very likely proceed through Chapter 7 bankruptcy.

Next time we’ll focus on the opportunities presented by this quirky way of calculating income for the means test.

 

Timing: Avoiding “Fraudulent Transfers”

October 4th, 2017 at 7:00 am

Giving a gift, or selling for less than true value, can cause problems when done before bankruptcy, but usually only if the amount is large. 

 

“Fraudulent Transfers” Are Uncommon

So-called “fraudulent transfers” do not come up in most consumer or small business bankruptcy cases. But they can sneak up on you. And if one does, it can be a real headache. So it’s important to know what it is, its crucial timing factors, and how to avoid it.

What’s a “Fraudulent Transfer”?

A fraudulent transfer is a reflection of human nature. If someone in financial trouble has an asset or money she wants to keep from her creditors she may be tempted to give it to someone so the creditors can’t reach it. Or she may be tempted to sell it for lots less than its worth.

The gift or sale may be to someone who would give it back later. Or the gift or sale may be to a friend or relative, keeping it within the debtor’s circle. The point is that the asset would no longer be available for her creditors to seize to pay the debts.

It’s human nature that if you have something valuable and are afraid of losing it, you hide it. You keep it from those who could take it. But that doesn’t mean this impulse is legal or moral. Because it’s an understandable impulse, there have been laws against it for at least 400 years in the English law we inherited.

The Results of a Fraudulent Transfer

So, a fraudulent transfer is a debtor’s giving away of an asset to avoiding paying creditors the value of that asset.

Under both federal and state fraudulent transfer laws if you give away something of value within the last two years, then your creditors could require the person to whom you gave that gift to surrender it to the creditors.

Legal proceedings to undo fraudulent transfers can happen both in state courts and in bankruptcy court. In a bankruptcy case, a bankruptcy trustee acts on behalf of the creditors to undo the transfer.

Actual and Constructive Fraudulent Transfers

There are two kinds of fraudulent transfers, based on either “actual fraud” or “constructive fraud.”

The one based on “actual fraud” happens when a debtor gives a gift or makes a transfer “with actual intent to hinder, delay, or defraud” a particular creditor, or his or her creditors in general. (See Section 548(a)(1)(A) of the Bankruptcy Code.) The debtor is acting with the direct intent to keep the asset or its value away from creditor(s).

Fraudulent transfers based on “constructive fraud” happen in consumer situations most often when a debtor gives a gift or makes a transfer receiving “less than a reasonably equivalent value in exchange,” AND the debtor “was insolvent on the date that such transfer was made.  . .  , or became insolvent as a result of such transfer.” (See Section 548(a)(1)(A) of the Bankruptcy Code.) With a constructive fraudulent transfer the debtor does NOT need to intend to defraud anybody. Yet the transfer can be undone if the right conditions are met.

Why Fraudulent Transfers Are Uncommon

There are three practical reasons why most people filing bankruptcy don’t have to worry about fraudulent transfers.

First, most people in financial trouble simply don’t give away their things before filing bankruptcy. They usually need what they have. Plus most of the time everything they do own is protected in bankruptcy through property “exemptions.” So there’s usually no reason to give away or sell anything.

Modest Gifts Are OK

Second, the bankruptcy system doesn’t care about relatively modest gifts. And most people considering bankruptcy don’t have the means to give anything but modest gifts.

By “modest” the bankruptcy system generally means a gift or gifts given over the course of two years to any particular person with a value of more than $600. The Bankruptcy Code does not refer to that threshold amount. But the pertinent official form that you sign “under penalty of perjury” does so.

The Statement of Financial Affairs for Individuals (effective 12/1/15) 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?

The Trustee Has to Consider Collection Costs

The third practical reason there usually isn’t a fraudulent transfer problem is what it costs the trustee to pursue one. The trustee has to pay attorney fees and other expenses to try to undo a gift or transfer. Or the trustee has to use his or her time or pay staff to do this. So the practical threshold value of the transferred asset is likely many hundreds of dollars. The trustee is not going to pay a lawyer or use his or her time when the likely benefits outweigh the costs.

This is important because there is a question in the Statement of Financial Affairs without a stated threshold dollar amount. This question (#18) asks:

Within 2 years before you filed for bankruptcy, did you sell, trade, or otherwise transfer any property to anyone, other than property transferred in the ordinary course of your business or financial affairs?

Notice the lack of a $600 minimum threshold found in the two questions referred to above. So, every applicable transfer must be listed here regardless of value.  But again, the bankruptcy trustee would likely not do anything about this unless the asset transferred was valuable enough to make the effort to undo the transfer worthwhile.

Caution

The trustee may be more inclined to try to undo a gift or transfer in one situation. If the trustee already has non-exempt (unprotected) assets to liquidate and distribute among the creditors, he or she may be more inclined to pursue a fraudulent transfer. That’s because then the trustee is not risking using his or her own money for the collection costs. The trustee knows there will likely be some money from liquidation of the non-exempt assets to pay those costs.

 

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