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The Role of a Bankruptcy Trustee

May 17th, 2019 at 2:45 pm

Texas bankruptcy attorneyComing to the decision that your best option is to file for bankruptcy is not easy. You may have taken weeks, if not months to realize that your best option is bankruptcy. The bankruptcy process can be confusing because of all of the legalities and people involved with the process. When you file for bankruptcy, the United States Trustee Program will assign you a bankruptcy trustee who will be responsible for overseeing your case. The trustee is one of the most important people in your case, so it is crucial that you understand the role of the trustee and the impact the trustee can have on your case.

What Is a Bankruptcy Trustee?

The role of a trustee was created to prevent the creditors and courts from having to be the ones responsible for collecting and distributing the property of those who file for bankruptcy. Trustees are independent contractors who are not employees of the bankruptcy court, but they must answer to the court and cannot take any kind of action until the court approves it. The trustee will evaluate and make recommendations pertaining to the demands of different debtors involved in the specific bankruptcy case they are assigned to.

Role of the Bankruptcy Trustee

The role of a trustee differs based on the type of case they are assigned to. Most bankruptcy cases will be assigned a trustee, except for Chapter 11 reorganization plans and Chapter 9 municipality cases.

Chapter 7 Bankruptcy Trustees

In Chapter 7 bankruptcy, your trustee is responsible for a couple of different things. First, it is the trustee’s job to make sure your bankruptcy claim is legitimate and not fraudulent. Your trustee will also be the person who determines whether or not you have any non-exempt assets. If you do, the trustee will also manage the sale of your assets and oversee the distribution of the proceeds to your creditors.

Chapter 13 Bankruptcy Trustees

The role of a trustee in a Chapter 13 bankruptcy is slightly different because the types of bankruptcies differ from each other. A Chapter 13 bankruptcy deals with a repayment plan, which your trustee will be responsible for overseeing. Your trustee will be your liaison between you and your debtors, making sure you have an affordable repayment plan, collecting your payments and distributing them to your debtors.

Contact a Texas Bankruptcy Attorney Today

One of the many aspects of a bankruptcy is the trustee, which is a crucial piece to the puzzle. Your trustee will make sure you have a reasonable bankruptcy plan, but sometimes you also need extra help. If you are thinking about filing for bankruptcy, you should talk with an experienced Kerrville, TX bankruptcy attorney. At the Law Offices of Chance M. McGhee, we will help you determine whether or not bankruptcy is appropriate for your situation. Call our office today at 210-342-3400 to schedule a free consultation.

 

Sources:

https://www.creditkarma.com/advice/i/bankruptcy-trustee/

https://www.thebalance.com/who-is-a-bankruptcy-trustee-316199

https://www.investopedia.com/terms/b/bankruptcy-trustee.asp

Exploring Federal and Texas Bankruptcy Exemptions

March 15th, 2019 at 4:27 pm

TX bankruptcy attorneyFor some people, filing for bankruptcy can be a scary thing. In the beginning, you may not know what the future has in store for you and you may wonder which of your possessions you are allowed to keep and which possessions you must give up. Exemptions are an important part of the bankruptcy process. In a bankruptcy case, exemptions are the possessions that you get to keep after you have liquidated your luxury assets to help pay back a portion of your debts. Each state has its own guidelines for what property is exempt during a bankruptcy. In 17 states, including the state of Texas, you are able to choose between state exemption guidelines or federal guidelines, but you must choose one or the other. It is important to understand bankruptcy exemptions because they do differ.

Federal Exemptions

The exemptions that are listed here are the exemption amounts for each individual bankruptcy filer. That means if both you and your spouse are filing for bankruptcy, you can double the amounts. Here is a list of the current federal exemption amounts for each individual filer:

  • Homestead Exemption: Up to $22,675 in equity for a primary residence;
  • Motor Vehicle: $3,775 for one vehicle per filer;
  • Jewelry: Up to $1,600 in jewelry, not including wedding rings;
  • Household Goods: A total of $12,625, but with no item valued more than $600 can be exempted. Household goods include clothing, furniture, appliances, linens, kitchenware, and personal effects;
  • Tools of the Trade: Up to $2,375 for items you use for work;
  • Domestic Maintenance: An amount reasonably necessary for support
  • Social Security, Unemployment, Veteran’s Benefits, Public Assistance, Disability: Exempt without regard to the value;
  • Personal Injury Awards: Up to $23,675, not including pain and suffering or actual pecuniary damages or loss of future earning capacity;
  • Retirement Accounts: Tax exempt retirement accounts are exempt, but IRAs and Roth IRAs are capped at $1,283,025; and
  • Wildcard Exemption: You may also exempt up to $1,250 of any property, plus $11,850 of any unused homestead exemption.

Texas Exemptions

The state exemptions in Texas are slightly different than the federal exemptions. Here is a list of exemptions you receive if you choose to follow state bankruptcy exemptions, rather than federal exemptions:

  • Homestead Exemption: You are permitted to exempt equity in your primary residence as long as that residence does not span more than 10 acres in a city, town or village, or 100 acres elsewhere;
  • Personal Property: If you are single, you can exempt personal property up to $50,000 in value. If you have a spouse, you are permitted to exempt up to $100,000 in personal property;
  • Motor Vehicle: You are allowed to exempt one motor vehicle per household member who has a driver’s license;
  • Pensions and Retirement Accounts: Most tax-exempt pensions and retirement accounts are exempt under Texas law. These can include government employee pensions and retirement accounts, IRAs and Roth IRAs, teacher’s retirement and pension benefits and law enforcement pension and retirement benefits.

Contact a New Braunfels, TX Bankruptcy Attorney Today

Many people who decide to file for bankruptcy do so because it is their last option for debt relief. While filing for bankruptcy can cause you to have to liquidate some of your non-necessary assets, you will not lose everything. At the Law Offices of Chance M. McGhee, we understand that filing for bankruptcy can be a hard decision, but we can help you throughout the entire process. Our skilled Boerne bankruptcy lawyers can help you understand the difference between federal and Texas state exemptions and choose the exemptions that would best benefit you. Call our office today at 210-342-3400 to schedule a free consultation.

 

Sources:

https://www.law.cornell.edu/uscode/text/11/522

https://statutes.capitol.texas.gov/Docs/PR/pdf/PR.41.pdf

https://statutes.capitol.texas.gov/Docs/PR/pdf/PR.42.pdf

Your Debts in Bankruptcy

February 4th, 2019 at 8:00 am

Bankruptcy is about debts. Different categories of debts are treated differently. The categories are secured, priority and general unsecured 


Your debts are the reason you are reading this. You want to know how bankruptcy would deal with your debts.

  • Will bankruptcy write off all your debts?
  • Can you keep paying some of your debts like a vehicle loan or home mortgage to keep that vehicle or home?
  • What happens to special debts that you can’t write off like child support and some income taxes?

To answer these and other similar questions we start by getting to know the 3 legally different categories of debts: 

  • secured
  • priority
  • general unsecured

Your rights and obligations, and those of the creditor, are different with each category of debt.

Secured Debts

Each of your debts is either secured by something you own or it is not. A secured debt is backed up by a lien, a legal interest of the creditor in some kind of property of yours. See Section 101(37) of the U.S. Bankruptcy Code.

Usually you know whether a debt is secured. For example, in a vehicle loan the vehicle’s title states that your lender is the lienholder. That lien on the title makes the loan secured by the vehicle. That, together with the security agreement you signed, gives the lender certain rights over your vehicle.

Sometimes you don’t know whether a debt is secured. For example, most purchases on major credit cards create a debt that is not secured by whatever you purchased. But some card purchases—such as on some retail store affiliated cards—do create a secured debt. The paperwork that came with your card (which you’ve likely thrown away!) should tell you. Your bankruptcy lawyer will also likely know, or can find out.

Occasionally, a creditor wanted the debt to be secured but it isn’t because the creditor messed up. It didn’t take the legal steps required to make that happen. This could mean that you don’t have to pay the underlying debt and still get to keep the property at issue.

A debt could also be only partially secured. If you owe $10,000 on a vehicle worth only $6,000, the debt is partially secured. It’s secured as to the $6,000 value of the vehicle and unsecured as to the remaining $4,000 of the debt. (See Section 506 of the Bankruptcy Code.) In the right circumstances you would not need to pay the full $10,000 debt and could still keep the vehicle.

Priority Debts

The law has selected some debts to be treated better than others, each for certain specific reasons. For example, child support payments are given many advantages, both inside and outside bankruptcy, because legislatures have decided that paying child support is an extremely high societal priority.

Priority debts are themselves prioritized within their different types. The higher-priority priority debts are treated better than the lower-priority one. Here’s a list of the most common priority debts for consumers or small business owners in order of priority:

  • child and spousal support
  • certain wages and other compensation owed to a debtor’s employees
  • certain (usually more recent) income taxes, and some other kinds of taxes

Priority debts are important in bankruptcy for a practical reason. Often only certain debts get paid, or get paid more than other debts. So a priority debt may get paid in full while other debts get paid little or nothing. We’ll explore how this works in Chapter 7 and Chapter 13 in our upcoming blog posts.

General Unsecured Debts

All debts that are not secured are unsecured debts.  “General” unsecured debts are just unsecured debts that are also not priority debts. So if a debt is not secured and does not fit any of the priority debt types, it’s general unsecured.  

Most people considering bankruptcy have mostly (and sometimes only) general unsecured debts. These include every possible way you can owe a debt. Examples include: most credit cards, just about all medical debts, personal loans without collateral, NSF checks, payday loans without collateral, unpaid rent and utilities, older income taxes, repossessed vehicle balances, most student loans, and other contract or legal claims against you.

Previously secured debts sometimes become general unsecured ones. One example: after a vehicle gets repossessed and sold, any remaining debt is a general unsecured one. Also, previously unsecured debts sometimes get secured. A general unsecured credit card balance can become secured by your home if the creditor sues you, gets a judgment, and records a judgment lien against your home.

 

Starting next week we’ll show how these different categories of debts are treated in bankruptcy.

 

What Is a “Means Test” and How Does It Affect Bankruptcy?

November 15th, 2018 at 9:01 pm

Texas bankrutpcy lawyerThere are not very many requirements when it comes to filing for bankruptcy in the United States. The requirements differ depending on what kind of bankruptcy you are filing for: Chapter 7 or Chapter 13. Both types of bankruptcies will affect your finances, but a Chapter 7 bankruptcy forgives all of your debt, while a Chapter 13 bankruptcy creates a repayment plan for three or five years. Because of this, it can be harder to obtain a Chapter 7 bankruptcy because the requirements are a bit more strict. One of the ways it is determined if you are eligible for a Chapter 7 bankruptcy is by using a “means test,” which basically determines whether or not you can afford to pay back your debts.

Part One: Calculating Your Income

This part of the means test is basically looking at your income to determine whether or not your household’s income is below your state’s median level. This is accomplished by filling out all of the required forms. The court will look at your total household income and compare it to the median household income for the size of your family. For bankruptcy cases filed in Texas after November 1, 2018, the median income for a family of four people is $81,958. The means test is based on the past six months, but it also takes into consideration recent or upcoming changes, like a job loss.

Part Two: Calculating Your Debt

Next, you will be required to disclose your allowable expenses, which can be things such as rent, groceries, clothing, medical costs, car payments, and other things. The court will look at your income versus your allowable expenses and determine whether or not there is anything left over at the end of the month that could be put toward paying off your debt. You must disclose all of your expenses and the amounts for them, or your case could be dismissed.

What Now?

If you pass the means test, you qualify to file a Chapter 7 bankruptcy. If you fail the means test, you still may be allowed to proceed with a Chapter 7 bankruptcy, but your best option might be a Chapter 13 bankruptcy, which helps you develop a repayment plan to pay back your debts over three to five years.. If you still want to proceed with a Chapter 7 bankruptcy, you can wait another six months to see if your financial situation will pass the test.

Get in Touch With a New Braunfels Bankruptcy Attorney

Though DIY is all the rage these days, a bankruptcy is not something that you want to attempt to do yourself. If you are thinking of filing for bankruptcy, you need to contact a skilled Kerrville bankruptcy lawyer. Bankruptcy can be confusing, but the Law Offices of Chance M. McGhee is here to help. Contact us to get help with your entire bankruptcy process. Do not go it alone – call the office today at 210-342-3400 to set up a consultation.

 

Sources:

https://www.nerdwallet.com/blog/finance/bankruptcy-means-test/

https://www.thebalance.com/the-means-test-overcoming-the-presumption-of-abuse-316358

The Surprising Benefits: Resolving the “Preference” Problem through Chapter 13

April 30th, 2018 at 7:00 am

Avoid the risks or persuading or negotiating with the Chapter 7 trustee by solving your preference problem through Chapter 13. 

 

Our last several blog posts have been about the problem of preference payments:

  • 3 weeks ago we introduced the problem resulting from paying a favored creditor before you file bankruptcy
  • 2 weeks ago we discussed avoiding the problem by delaying filing your case or persuading the trustee to do nothing
  • Last week was about negotiating with the trustee to pay off the preference money yourself

Today we get into how to solve this problem by filing a Chapter 13 “adjustment of debts” case instead of a Chapter 7 “straight bankruptcy” one.

When Filing a Chapter 13 Case May Be Worthwhile

A Chapter 13 case is very, very different from a Chapter 7 one. For starters, instead of taking about 4 months a Chapter 13 case almost always takes 3 to 5 YEARS.  Using it to resolve a preference is almost never a good enough reason to file a Chapter 13 case.

But Chapter 13 CAN be better than Chapter 7 in many situations. It can accomplish a lot that Chapter 7 can’t. So if you already have a good reason or two to consider a Chapter 13 case, using it to solve a preference problem as well may push you in that direction.

Let’s say you have an expensive vehicle loan that you’re a month behind on. Chapter 13 would allow you to cramdown that loan. That would reduce your monthly payments and the total you would pay. Plus you wouldn’t have to catch up on the missed payment. Yet you’re on the fence as you wonder if the disadvantages of Chapter 13 outweigh these savings. So if you have a preference problem that Chapter 13 would deal with, that could push you into deciding on Chapter 13.

When You Really Need to Use Chapter 13

The Chapter 7 solutions don’t always work:

  • You often don’t have the luxury of delaying your bankruptcy filing enough so that more than 90 days has passed after the preferential payment. (Or a full year has passed, if the payment was to an “insider” creditor)
  • The trustee may pursue your previously paid creditor in spite of your bankruptcy lawyer’s efforts to dissuade the trustee.
  • You may not have the ability to pay off the trustee yourself. Or you may owe too much to pay it off fast enough to satisfy the trustee.

So you’re looking to file bankruptcy and your lawyer advises you that none of these three are going to work. Then, if you want to avoid having a Chapter 7 trustee chasing your prior-paid creditor, consider the Chapter 13 solution.

How Does Chapter 13 Fix a Preference Problem?

Chapter 13 solves the preference problem by enabling you to pay the trustee within your payment plan. You pay enough extra money into your Chapter 13 plan to pay what you would have paid a Chapter 7 trustee. But you have significant advantages in doing it this way.

But first an example to show how this works. Assume you paid off a debt of $2,500 to your sister 60 days before filing bankruptcy. You’d gotten a tax refund and she desperately needed the money. You’d put her off for years and then had promised to pay her from the refund. Now you’re about to have your home foreclosed on so you can’t wait to file bankruptcy. If you filed a Chapter 7 case the bankruptcy trustee would force your sister to return the $2,500. She’d get sued if she didn’t. You absolutely don’t want that to happen. So you file a Chapter 13 case—which you be doing anyway to save your home. Your lawyer calculates your Chapter 13 payment plan to pay an extra $2,500 beyond what you would otherwise need to pay. You pay that extra amount over the course of your 3-to-5-year case. This may increase your monthly payment somewhat, or it may extend the length of your case. But your sister would not have to pay back anything. The trustee would have no need to even contact her.

Advantages of Using Chapter 13

1. When you file a Chapter 7 case hoping to persuade the trustee not to pursue your prior payee, you may not know if that’ll work. Or if you hope to negotiate payments to the trustee, you don’t know if that will work. The trustee may want to try to get the money out of your payee after all. Or your trustee may reject your offer in order to get the money faster from your payee. Using Chapter 13 takes away these risks. The system allows you to use your Chapter 13 plan to pay what’s needed.

2. Chapter 13 gives you much more time to pay what you need to pay. A Chapter 7 trustee’s job is liquidation. He or she is under pressure to wrap up your case quickly, and so will pressure you to pay quickly. Ask your lawyer but generally a Chapter 7 trustee won’t give you more than a year to pay up. And he or she may simply require you to pay it all in a lump sum. In contrast, under Chapter 13 you have 3 to 5 years to pay.

3. You have more control over where the money goes, and when. Chapter 13 is often used to pay creditors that you want to or need to pay. For example, if you owe a recent income tax debt or back child support, it’s much better to have those debts paid through a court-ordered Chapter 13 payment plan.

4. You have more control over when debts are paid. If you have a debt or two that needs to be paid quickly, that can often be paid first. For example, if you need to catch up on a car payment (because it doesn’t qualify for cramdown), your plan may front-load money there. The extra money you are paying because of the preference can be put to better use early in your case.

 

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.

The Surprising Benefits: Use “Preference” Money to Pay a Favored Debt

April 2nd, 2018 at 7:00 am

When a creditor is forced to pay back recently received money through “preference” law, that money can go to pay a debt you want to be paid. 


Last week we introduced 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. There are some complicated conditions that may apply, but in many situations the creditor does need to pay it back. See Section 547 of the Bankruptcy Code.

We ended last week by asking where this returned money goes. What good does it do you if that money just goes to your Chapter 7 trustee?  After all, this liquidating trustee’s job is to distribute that money among all your other creditors. So how does that help you?

Chapter 7 Trustee’s Collection of Bankruptcy Assets

It’s true that under Chapter 7 “straight bankruptcy” it’s your bankruptcy trustee who makes a creditor return a “preferential payment.” The Bankruptcy Code says “the trustee may avoid” a preference payment. It’s not you, the debtor, who has that role. Section 547(b). (“Avoid” means requiring the creditor to pay the recently received money back, but to the trustee.)

That returned money then goes into the pool of money the trustee uses to pay your creditors. In most consumer Chapter 7 cases that’s the only money available to the trustee. That’s because everything that most debtors own is protected through property exemptions. Exemptions are categories and maximum amounts of assets that you can keep in bankruptcy under state and/or federal law. So, when a trustee avoids, or undoes a creditor’s preferential payment, that money is all the trustee has to work with.

Whether the trustee only has the preference money or also liquidates an unprotected asset, what happens to the resulting money?

Chapter 7 Trustee’s Distribution of Bankruptcy Assets

Once the trustee has received the preference money (plus any other money from liquidating assets), he or she is required by law to then distribute that money in a very specific way. The law is laid out in the Bankruptcy Code’s Section 726, “Distribution of property of the [bankruptcy] estate.”

The distribution rules say that “priority” debts get paid in full before anything goes to any other debt.  Section 726(a)(1) says the money first goes to debts under Section 507, which are a listing of the priority debts.

When an “Avoided Preference” Directly Benefits You

Simply put, if you want or need to pay a debt that’s a “priority” debt, the trustee will pay it. The trustee will pay it out of the money it got from the creditor by “avoiding” the preference payment. The trustee will pay your favored priority debt before paying any other debt.

For example, an unpaid child support payment or recent income tax debt would be a priority debt. These debts could not be discharged—legally written off—in a bankruptcy case. So you’d have to pay them after your Chapter 7 case was completed. But the trustee would pay such a debt from the preference money. That would either eliminate or reduce what you’d have to pay yourself.

If your priority debt that you’d like to be paid is larger than the amount of money the trustee has from the preference, the trustee would only pay part of that priority debt. If the trustee has more than enough money, he or she would pay off the whole priority debt.

(The trustee also gets paid a fee out of the same money, so you need to take that fee into account. The fee is based on a sliding scale: a maximum of 25% on the first $5,000 distributed, 10% on the next $45,000, etc. See Section 326(a).)

Conclusion

Preference law can make a creditor give up money it took from you shortly before you filed your bankruptcy case. Then this same money can instead go to pay a priority debt which you very much want to get paid.

This is quite a nice benefit of bankruptcy. You can force one of your less important creditors in effect to pay your most important creditor!

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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