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Archive for the ‘bankruptcy fraud’ tag

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.

 

Two Examples of Bankruptcy Timing with Medical Debts

September 20th, 2017 at 7:00 am

How to know whether to delay filing bankruptcy when you’re expecting new medical services and their medical debts?  Here are two examples.   


Our last blog post was about the importance of timing your bankruptcy filing to include more of your debts.

One example we used was of a person with unresolved medical issues requiring ongoing medical care. That person could be overwhelmed by medical and other debts already owed. But he or she may wonder whether it would be wise to hold off on filing bankruptcy until the anticipated medical debts were incurred and so could be included.

We’ll now present two examples of this situation, each with different facts. We’ll show how these different facts resulted in these two people getting quite different legal advice.

Jeremy’s Facts

Jeremy is 30 years old, and single. He was in a car accident a year ago, resulting in serious injuries and huge medical bills. He’s not yet medically stable. He was underinsured, so that a big chunk of his medical expenses were covered but a lot were not. Because he’s maxed out his vehicle insurance coverage he’ll be liable for most of his future medical expenses.

Jeremy currently owes $50,000 in medical debts, plus another $60,000 in credit cards and various other unsecured debts. In the next year or so he expects to add on another $30,000 to $40,000 in medical bills.

Jeremy does not have much in assets. His current income is low, as are his immediate prospects. That’s largely because he’s working a limited schedule as a result of his injuries, medical appointments and surgeries. He was in the military and so didn’t finish college until a couple of years ago. His future income prospects are quite good.

Should Jeremy File Bankruptcy Now or Wait?

If Jeremy would file bankruptcy now, it wouldn’t write off (“discharge”) his upcoming $30-40,000 in medical bills. A year from now he’ll be back in the hole that much.

He could then try to negotiate his way to paying reduced amounts. And if his income increases he may end up being able to pay off his debts, eventually. But that is not a satisfactory solution.

His bankruptcy lawyer instead advises that he wait to file a Chapter 7 “straight bankruptcy” until he became medically stable and had incurred most or all of his medical debts.

Jeremy has limited exposure to harm by his creditors in the meantime. All of his assets are “exempt”—worth little enough to be fully protected from his creditors, even outside bankruptcy. His income is sporadic and low enough that he’d lose little if his wages were garnished. Jeremy hasn’t been sued yet. That may be in part because his creditors don’t see him as a good prospect for forced collection.

So Jeremy does wait, finishes his surgeries and other medical procedures, racking up another $35,000 in medical bills, and then files a Chapter 7 case to discharge all of his debts.

Mary’s Facts

Mary is 65 years old, also single. She had a heart attack two years ago. Like Jeremy she owes $50,000 in medical debts, plus another $60,000 in credit cards and various other unsecured debts. Her heart ailment is a chronic condition which will definitely require medical attention the rest of Mary’s life.

She works full time in the same job she’s had for a decade. Her income is modest but high enough so that if her wages were garnished she would lose a significant amount.

Indeed she just got served with a lawsuit by her largest medical creditor for $10,000. This creditor likely sued knowing that it could likely get paid through wage garnishments.

Should Mary File Bankruptcy Now or Wait?

Because Mary just turned 65 years old she now qualifies for Medicare. She expects to have both Medicare Part A (hospital insurance) and Part B (medical insurance). She understands that these will pay for most of her anticipated medical costs.

So with her future medical expenses largely taken care of, there is no reason for Mary to wait to file bankruptcy. The just-filed lawsuit for $10,000 is good reason not to wait. If she files a Chapter 7 case through her bankruptcy lawyer before her deadline to respond to the lawsuit, she will prevent it from turning into a judgment and then a garnishment.

So Mary does just that. She files the Chapter 7 case, stops the lawsuit in its tracks, and within about 100 days discharges that $10,000 and all the rest of her debts. She gets a fresh financial start heading into her retirement years.

A Moral and Legal Note

Note that incurring a debt, medical or otherwise, when you intend not to pay it is questionable, legally and morally.

The moral question is a personal one. If it’s a matter of your life and death, or even just of your health more broadly, it’s likely defensible to have a surgery or other medical procedure done even if you knew you couldn’t pay for it and intended to discharge the resulting debt in bankruptcy.

The legal question is clearer but still murky. The law does not approve of incurring a debt when you don’t intend to pay it. That can be considered fraud on the creditor. It may turn on the facts of the case. If you’re in the midst of a medical emergency you may not be conscious and able to give your consent for medical services.  Also, most medical creditors don’t raise objections base on issues of fraud in bankruptcy. And when they don’t raise this issue by a quick deadline, they lose the opportunity to do so in the future. So this legal problem usually resolves itself in this practical way.

Talk with your bankruptcy lawyer about these moral and legal issues if you are considering delaying your bankruptcy filing in order to include future debts.

 

The Closing Arguments in a Dischargeability Proceeding: an Example

April 5th, 2017 at 7:00 am

In our example about the adversary proceeding about whether a debt gets discharged, here are the creditor’s and debtor’s closing arguments. 

 

Here’s the fifth blog post in a series showing how a dischargeability dispute gets resolved in bankruptcy court. Check out the last four posts about the different steps in the “adversary proceeding” so far, including the trial itself. Now it’s time for the two sides to give their closing arguments to the bankruptcy judge.

The Creditor’s Closing Argument

The lawyer for the creditor says the following to the bankruptcy judge:

As the U.S. Supreme Court said way back in 1934, bankruptcy law “gives to the honest but unfortunate debtor… a new opportunity in life… unhampered by the pressure and discouragement of preexisting debt.”

As the debtor here fully admits, he was NOT honest with his creditor, Heather, his aunt. Marshall admitted that he purposely did not include his debt to another aunt on his loan application to Heather. He admitted that he did this because he was afraid that otherwise Heather would not give him the loan. He desperately wanted that loan. It was the only way he could start his business. So he stooped to lying, and put his lie in writing. He then signed the loan application, dishonestly asserting that what he wrote was truthful.

Marshall’s omission was not insignificant or immaterial.

The outstanding loan balance was $7,500. This amount was enough that, had Heather known about it, that outstanding loan likely would have given Heather pause about providing her own loan.

The existence of the prior loan was a material fact and his omission of it was a material omission. That prior loan was another family loan. Had Heather known about it, she could well have figured that if money got tight for Marshall down the line and he had to choose, he’d pay the earlier loan ahead of hers. So Heather definitely deserved to know about that loan balance before she made her decision about giving Marshall a new loan.

The Creditor Lawyer’s Conclusion

Marshall says now that he believed at the time that Heather would not base her decision on the loan application. He tells us his impression at the time was that this documents wasn’t all that important. And yet Heather told him directly that she had her lawyer prepare the application and other loan documents because she wanted the loan to be legally enforceable. He had every reason to know that the loan application was a meaningful document. He knew he needed to take it seriously, that he had every obligation to complete it truthfully. He can’t now use the excuse that he didn’t have to be honest because Heather wouldn’t treat the application seriously in making her decision.

Marshall materially lied on the one and only document that he presented to Heather to have her decide whether or not to give him a loan. He cannot now claim to be an “honest but unfortunate debtor” deserving to write off his debt to Heather. This court must therefore exclude this one debt from the discharge Marshall is getting of his other debts.

The Debtor’s Closing Argument

Then the lawyer for Marshall, the debtor, says the following to the judge:

The creditor here, Heather, has failed to establish three different elements of her case. If she fails to establish even JUST ONE of these elements, the debt must be discharged.

First, while Marshall’s omission was admittedly false, it was not materially false. What’s crucial to the omission being material is not the amount of the prior loan. Nor is it that this prior loan was a family loan like Heather’s. What is crucial under the law is whether Heather would have made the loan to Marshall if he would have included the other aunt’s prior loan in Heather’s loan application. An omission is material if it would have made a difference in the creditor’s decision to make the loan.

The evidence is quite clear that not including the prior loan was not a material omission. Heather admitted she didn’t even look at the completed loan application, nor discuss its contents with her lawyer.  Heather testified here that she based her lending decision on family considerations, not on Marshall’s finances. Whether one particular debt was or was not included in the loan application had no bearing on Heather’s decision. The omission was immaterial.

Second, Marshall did not omit the prior debt “with intent to deceive” Heather. He completed the application with the understanding that what he wrote on it was not important to Heather. He was reasonable in this understanding because that was what he had heard, albeit indirectly, from Heather. She signaled strongly to him that her decision was being made primarily or even exclusively because of their relationship. This included both their family and personal relationship.

Marshall admitted that he intentionally did not include the prior debt, but for a very specific reason. He knew that at the time Heather was having a quarrel with his other aunt who’d made that prior loan. Marshall knew Heather could be impulsive, erratic, and even irrational. So Marshall was justifiably concerned that Heather would somehow let some irrelevant irritation cause her to deny him the loan. He imagined her telling him to instead just go back to that other aunt for more money. He already knew the other aunt was unable to lend him what he needed. His only intent in not listing the prior loan on the application was to avoid having Heather hit an emotional tripwire that would distract her from her decision to make the loan.

The Debtor Lawyer’s Conclusion

Third and most clearly, Heather did not rely on, much less reasonably rely on, on the loan application in her decision. She particularly didn’t rely on Marshall’s omission of the other loan. She never read the application, didn’t discuss the contents with her lawyer, and nothing about the application entered into her loan-making decision.

This creditor bases her entire argument on Section 523(a)(2)(B) of the Bankruptcy Code. That requires the use of a materially false “statement in writing” on which the creditor “reasonably relied.” It’s perfectly clear from the evidence presented at this trial that the creditor here does not meet this element of reasonable reliance. So just as perfectly clearly the debt at issue here should be discharged in this bankruptcy case.

The Judge’s Decision

Our next blog post in a couple days will give, and then explain, the judge’s decision about whether or not this debt will be discharged in bankruptcy.

 

Discovering the Facts in a Dischargeability Proceeding: an Example

March 31st, 2017 at 7:00 am

Here’s how the debtor and creditor get at the facts in an adversary proceeding about whether a debt gets discharged. 

 

We’re going through a series of blog posts showing by example how a creditor’s formal objection to discharge goes in bankruptcy court.

Here are the facts, briefly. Five years ago Marshall got a $35,000 loan from his aunt, Heather. But he wasn’t completely upfront with her at the time, neglecting to list in his loan application a $7,500 debt to another aunt. So now, after Marshall filed bankruptcy, Heather filed a formal complaint accusing him of fraud for this lying by omission. Specifically, she alleged that his omission about the other loan was “materially false,” Heather “reasonably relied” on that omission in making the loan, and Marshall made the omission “with intent to deceive” her. (There are other elements of fraud but these are the ones that are at issue in this example.)

Marshall filed an answer by denying that this omission was “materially false.” That’s because he thought that Heather would have made the $35,000 loan even if she had known about the $7,500 balance on the earlier loan. He also denied that Heather had “reasonably relied” on his omission because he didn’t think that she had relied on the application at all. Finally, Marshall denied that he’d excluded the prior $7,500 “with intent to deceive” Heather. He hadn’t thought she’d care one way or the other.

He felt he hadn’t set out to cheat her at all. Since he hadn’t, he understood the law gave him the right to legally write off the now-$21,000 debt in bankruptcy.

Burden of Proof

Debts like Marshall’s get discharged unless the creditor finds legally valid grounds for the bankruptcy court to deny discharge. The burden is on the creditor to find facts supporting those grounds.

Here in our example Heather has to bring evidence establishing ALL of the following:

  • Marshall’s omission was “materially false.” That is, the omission not only made his application false. It was so false that Heather would not have made the loan had Marshall included the $7,500 debt.
  • Heather had “reasonably relied” on the omission in making the loan. That is, Heather had at the time not only relied on the lack of a $7,500 loan. She had relied on that omission reasonably. Under all the circumstances it made sense for her to rely on the accuracy of Marshall’s application.
  • Marshall acted with “intent to deceive” Heather. He had not included any reference in the loan application to the $7,500 he owed to the other aunt because he purposely wanted to fool Heather into giving him the loan.

“Discovery” Methods

“Discovery” is the formal procedure for discovering the relevant facts in a lawsuit. In our context it’s the way that Marshall and Heather get at the facts relevant to their discharge dispute.

The facts are “discovered” mostly through these four methods:

“Discovery” in Our Example

The lawyers for Marshall and Heather wanted to try to keep litigation costs down for their clients. So they agreed to avoid depositions if they could get the facts they needed without them. Depositions can be time-consuming and expensive.

So both parties prepared and delivered Interrogatories.

Heather’s Interrogatories to Marshall

Here are some of the most important interrogatories that Heather presented to Marshall, along with his sworn answers:

1. Were you aware of the $7,500 balance you owed your other aunt at the time you completed Heather’s loan application?

Yes.

2. If you were aware of this other loan balance, why did you not include it in the application?

I did not include it because I really didn’t think Heather would care one way or the other. I’d made payments on that personal loan perfectly, bringing it down from $20,000 to the $7,500 balance at the time. I figured that with this payment history that existing loan was more of a positive than a negative to Heather. It showed my creditworthiness on family loans. However, I’d heard that Heather was in an unpleasant dispute with the other aunt. Heather had a reputation for being unpredictable. So I was afraid of giving her any excuse to not give me the $35,000 business loan. I was pretty desperate to get it from her.

3. Did you intend to deceive Heather into making the loan by omitting the $7,500 debt you still owed to your other aunt?

No. First, I really didn’t think that Heather was basing her decision on the loan on financial and risk considerations. Based on my conversations with her, she seemed to be motivated mostly by family considerations. She was pretty well off, didn’t have kids of her own, and was excited about my business venture. She expressed a desire to help, out of affection and family connection. She acted like the application was a formality and wouldn’t be a major basis for her decision.

Second, I thought Heather may well already know about that other debt. I had borrowed the $20,000 years earlier from the other aunt to get a 2-year community college degree. I knew these two aunts were not very close, but that earlier loan wasn’t any big secret. I figured there was a good chance that Heather already knew about it.

I wasn’t trying to fool her into thinking I was debt-free so that she would make the loan.

Marshall’s Interrogatories to Heather

Here are some of the most important interrogatories that Marshall presented to Heather, along with her sworn answers:

1. Were you aware that Marshall had taken out a loan from his other aunt at the time you agreed to lend him the $35,000 for his new business?

No. I’d heard vaguely about it a few years before that. But it was not in my mind at the time I was considering whether to make the $35,000 loan. I did not know whether he’d paid it off, was making payments at the time, or any such details.

2. If you had been made aware of the $7,500 debt by Marshall including it on his application, would you have made the $35,000 loan to him?

I don’t know. Hard to tell now, more than five years later. It would have made it less likely, for sure. I WAS a little nervous about making the loan anyway. That could have pushed me to change my mind.

3. Did you review the application after Marshall had completed it?

I had my lawyer prepare the application form and I asked her to review it when he’d completed it. But no, I didn’t read it myself. I remember vaguely talking with my lawyer about it, but nothing specifically.

4. On what did you base your decision to make the loan to Marshall?

On whether he was worthy of getting the money. He’d always been a good guy. I don’t have any kids myself. I’d always liked him. He was always a hard worker, an honest young man. He had gotten some bad breaks earlier and I wanted to help. His business plan sounded sensible. He was family.

But now he needs to pay me back. Just because he can write off his other debts doesn’t mean he should write off this one. I was loyal to him. He should return the loyalty by paying back this debt to me.

Next, the Trial

With these facts on the table, this adversary proceeding is ready for trial. We’ll finish with that in our next blog post on Monday.

 

Consumer Warning: A Scam Targeting Bankruptcy Filers

January 27th, 2016 at 8:00 am

Watch out for phone calls seemingly from somebody you think you should trust with reliable sounding information, requesting fast money.

 

You Wouldn’t Be Fooled by This

If you get an email written in imperfect English from somebody saying she needs your help to move a huge amount of money out of her African country, and that you’ll get a healthy percentage of that amount if you just provide your bank account information, you probably know better than to respond to that email.

Here’s a part of an email  which is an example of these advance-fee scams, in which you’re invited to send money to a stranger on the promise of some fast money for you:

Dear Beloved Friend,

I know this message will come to you as surprised but permit me of my desire to go into a business relationship with you.

…  my late father came to Cotonou Benin republic with the sum of US$4.2M which he deposited in a Bank her in Cotonou Benin Republic West Africa for safe keeping.

I am here seeking for an avenue to transfer the fund to you in only you’re reliable and trustworthy person to investment the fund. I am here in Benin Republic because of the death of my parents and I want you to help me transfer the fund into your bank account for investment purpose.

Please I will offer you 20% of the total sum of US$4.2M for your assistance. Please I wish to transfer the fund urgently without delay into your account and also to relocate to your country due to the poor condition in Benin, as to enable me to continue my education as I was a medical student before the sudden death of my parent’s. Your immediate response would be appreciated.

But Imagine If…

If instead the following happened you might more likely be fooled:

  • You get a phone call on your cell phone with your screen showing it’s from your attorney’s office, or from the IRS
  • The person on the phone gives you information about one of your real creditors, saying you have to send your attorney or the IRS a familiar sounding amount to deal with that creditor quickly
  • The call comes at a time or day that you can’t quickly call back your attorney’s office or the IRS to verify the call, and you’re told you’re at risk of being arrested if you don’t take care of it immediately
  • The person asks for information you’ve already provided your attorney’s office in the form of your bank account, so that you don’t think much of just providing it again.

This is the kind of scam that has successfully fooled recent bankruptcy filers. In Vermont recently a 70-year old woman lost $700 and another woman lost $686.

This scam prompted the Vermont Attorney General to send out a press release titled: Attorney General Warns Of Scams Targeting Bankruptcy Filers, which included the following:

The perpetrators of this scam use software to “spoof” the Caller ID system so that the call appears to be originating from the phone line of the consumer’s bankruptcy attorney. Consumers are then instructed to immediately wire money to satisfy a debt that is supposedly outside of the bankruptcy proceeding.

The Attorney General’s Office is reminding all consumers to be wary of any calls they did not initiate that demand or solicit funds for any purpose. Currently active scams include calls from scammers posing as agents of the IRS, debt collectors for payday loans, family or friends in need of emergency assistance, and technical support for Windows computers.

Consumers should never give out personal or account information to an unverified source.

To Repeat…

We all know that last sentence is very sensible. The challenge is not being taken advantage of in this more sophisticated way by somebody sounding authoritative and reliable, just when you’re feeling vulnerable.

If you or a family member gets this kind of call, hang up and reach your bankruptcy attorney as soon as possible. Do NOT give out any personal or financial account information to the caller.

 

Call today for a FREE Consultation

210-342-3400

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