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Archive for the ‘bankruptcy trustee’ tag

What Does a Bankruptcy Trustee Do?

September 16th, 2019 at 4:40 pm

trusteeThe most common types of bankruptcies that are filed in the United States are Chapter 7 and Chapter 13 bankruptcies. There are many differences between a Chapter 7 bankruptcy and a Chapter 13 bankruptcy, mainly in the way that the debts are handled. While these two types of bankruptcies differ greatly in many aspects, they do have one thing in common — they both utilize a bankruptcy trustee.

If you have thought about getting a bankruptcy or you have done research about getting one, you have probably come across the term — but do you know what a bankruptcy trustee is? It is important to understand the role of the trustee if you are getting a bankruptcy or considering one.

What Is a Bankruptcy Trustee?

A bankruptcy trustee is a person who works on a bankruptcy case to act as the middleman between the debtor and the creditors. The trustee is not an employee of the bankruptcy court, but rather an independent contractor who is hired to prevent the court itself from having to collect and/or distribute property. Trustees are also responsible for reviewing all financial information that is submitted by the debtor to ensure it is accurate and true.

Trustees in a Chapter 7 Bankruptcy

In a Chapter 7 bankruptcy, or liquidation bankruptcy, your non-exempt assets are liquidated or sold so that you can repay as much of your debt as possible before the rest of it is discharged. A trustee in a Chapter 7 bankruptcy is responsible for determining which of your assets are non-exempt and using the money from those to repay your debtors.

Trustees in a Chapter 13 Bankruptcy

In a Chapter 13 bankruptcy, you reorganize your debts so that you can come up with a three- to five-year repayment plan to pay back all or most of your debts. In this type of bankruptcy, your trustee is responsible for overseeing the repayment plan. He or she will collect your payment each month and distribute it to your debtors.

Questions About the Bankruptcy Process? A San Antonio, TX Bankruptcy Attorney Can Help

Making the decision to file for bankruptcy is a serious one. Your credit score will be affected and the bankruptcy will appear on your credit report for a number of years. Ultimately, the bankruptcy trustee can affect your bankruptcy case for the good or the better, which is why it is important to understand their role in your bankruptcy case. If you are thinking about filing for bankruptcy, you should talk with a knowledgeable Boerne, TX bankruptcy lawyer. At the Law Offices of Chance M. McGhee, we can help make sure your bankruptcy process is smooth and as stress-free as possible. Call our office today at 210-342-3400 to schedule a free consultation.

 

Sources:

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

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

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

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

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.

 

Timing: Avoiding Very Troublesome “Preference” Payments

October 2nd, 2017 at 7:00 am

Sometimes in bankruptcy doing the honestly right thing can cause you major problems. Making preference payments is a good example of this. 


The Understandable Inclination to Pay a Favored Creditor

If you’re having financial problems and considering bankruptcy, you might feel compelled to first take care of a special debt. You may owe a relative or friend who is in real need of the money. You may feel deep and legitimate pressure to pay part or all of it in spite of your own financial problems. You may figure, accurately or not, that you won’t be allowed to pay this person after filing bankruptcy. Or for various reasons you may not want to involve this person in your bankruptcy case. You may not want to have him or her know about it. So you figure the best way to do that is to pay off or settle the debt beforehand.  

But your intentions—good or otherwise—could significantly backfire, if you don’t know the law and don’t get good advice.

The Dangerous, but Avoidable, “Preference” Payment

“Preference” payments are among the most frustrating situations in bankruptcy. They seldom happen but are a major headache when they do.

Because of the trouble they can cause, trouble that is often easy to avoid, “preferences” are worth understanding.

The Law on “Preferences”

So what are “preferences” and why are they a problem?

Bankruptcy law say that 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 had paid to this creditor earlier. (See Section 547 of the U.S. Bankruptcy Code on “Preferences.”)

In other words if you pay a special creditor during the year before filing bankruptcy, that person (or business) could be required to return that money.

The money would usually be returned not to you but to your bankruptcy trustee, to be re-distributed among your creditors. So instead of having a satisfied favored creditor, you would likely have a very unhappy one. You had wanted to fulfill your moral obligation to the creditor. Instead he or she would get a legal demand by your trustee to cough up the money you’d paid. Your friend/relative would have to scrape up the money you paid to him or her months earlier—very likely spent by then—to pay to the trustee.

After this would happen you may even feel morally compelled to pay that person yourself a second time. You might want to make up for the money the trustee took away from him or her.

The Point of “Preference” Law

What could possibly be the point of this 1-year “preference” rule? It is meant to promote one of the basic principles of bankruptcy law—legally equal treatment of creditors. This principle applies mostly DURING your bankruptcy case. However, to a limited extent the law also looks 1 year backwards from the time you and your bankruptcy lawyer file your case.  

So people in financial trouble are discouraged from playing favorites among their creditors for a year before filing bankruptcy. This is supposed to make the situation more financially fair to all the creditors.

One Scenario

Here’s an example to help make sense of this odd concept.

Imagine that you’ve owed your sister $3,000 for money she lent you so that you could pay your rent. You haven’t had the money to pay any of it back. She now really needs the money. Plus you really don’t want her or the rest of your family to know you’re filing bankruptcy. You’ve stopped paying other creditors for a while so you’ve scraped together the money to pay off this debt. You intend to pay it off and then file bankruptcy right after because you’ve recently been sued by a creditor. You know your paycheck is getting garnished in a few weeks if you don’t stop that by filing bankruptcy.

But here’s what would happen if you paid off your sister and then filed bankruptcy (within a year after).

A month or two after filing bankruptcy your bankruptcy trustee would very likely demand that your sister pay $3,000 to the trustee. If she didn’t pay, the trustee would likely sue her to make her pay. Once she did pay, that $3,000 would be divided among your creditors according to a set of priority rules. Your sister would be out $3,000. You may then feel obligated to pay her that, again. She (and probably your whole family) would know about your bankruptcy filing. Everybody would be unhappy.

It’s Usually an Avoidable Problem

This “preferences” mess can be avoided simply by not paying your favored creditors anything during the year before filing. This includes both money and anything else of value.

And if you do pay anything to such clients, hold off on filing bankruptcy for a year after.

That’s easier said than done when you have creditors suing or creating other collections problems. Your lawyer could likely help keep these creditors at bay. More broadly he or she would put together your best game plan for dealing with all of this.

 

“Property of the Estate” Excludes Property in a Spendthrift Trust

May 29th, 2017 at 7:00 am

If you are the beneficiary in a spendthrift trust, most likely a bankruptcy trustee can’t touch whatever property is in that trust.  

 

Power of Attorney vs. Spendthrift Trust

Our last blog post focused on your rights under a power of attorney over someone else’s property. A conventional power of attorney commonly requires you to use that property only for another person’s benefit. If so, then your legal control over that property isn’t enough to make that property yours for bankruptcy purposes. So if you file a Chapter 7 case the bankruptcy trustee has no power of that property. It is not included in the property of your bankruptcy estate. (Section 541(b)(1) of the U.S. Bankruptcy Code.)

A power of attorney can be created for a million reasons. But the most common probably involves an elderly parent giving someone else, often their adult child, the power to use that parent’s property to pay the parent’s expenses when he or she no longer has the mental capacity to do so. The parent’s property does not become the adult child’s property because the child has only limited control over it.

Today we look at a somewhat similar situation, with a similar result: a spendthrift trust. As with a power of attorney, as the beneficiary of a spendthrift trust you have limited control over property in the trust.

A spendthrift trust involves someone giving property to another, but that property comes with a significant restriction. Instead of giving the property directly to the recipient, the grantor puts it into a trust. The trust holds the property on behalf of the recipient—the beneficiary of the trust. The beneficiary has tightly restricted access to and control over that property. The terms of that access and control are laid out in the trust document.

The Spendthrift Clause

A trust is a spendthrift trust if it has the right restriction to access. That restriction is contained in a legally enforceable spendthrift clause.

A spendthrift clause typically states that the beneficiary cannot voluntarily or involuntary transfer its rights to the property to anybody else. “Voluntarily” means that the beneficiary can’t get at the property within the trust except as stated in the trust’s language. “Involuntarily” means that the beneficiary’s creditors can’t get at the trust property either.

Legally Enforceable Spendthrift Clause

The Chapter 7 trustee also can’t get at the trust property either as long as the spendthrift clause is legally enforceable. How do you know whether or not it is?

The Bankruptcy Code says the following:

A restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law is enforceable in a case under this title.

Section 541(c)(2). The “restriction on the transfer” referred to here is the language found in the spendthrift clause. It’s saying that if the spendthrift clause found in a trust “is enforceable under applicable nonbankruptcy law,” then it is enforceable in a bankruptcy case.

Each state has its own laws on what “restriction on the transfer” in a trust is legally enforceable. So talk with your bankruptcy lawyer about whether the trust of which you are a beneficiary has an enforceable spendthrift clause. If so the property in the trust will not become property of your bankruptcy estate. It will be protected from the clutches of your Chapter 7 trustee.

 

The Trustee in a Consumer Chapter 7 Case

May 8th, 2017 at 7:00 am

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

 

The Trustee Is a Liquidator, Sometimes

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

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

Information for the Trustee

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

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

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

The “Meeting of Creditors”

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

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

Other Trustee Responsibilities

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

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

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

Is the Trustee Your Adversary?

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

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

 

Are Charitable Gifts Fraudulent Transfers?

May 1st, 2017 at 7:00 am

Charitable donations made during the two years before filing bankruptcy may fall within a safe haven of not being fraudulent transfers.

The Quick Answer

To answer the question in the title directly, charitable gifts you make before filing bankruptcy COULD be fraudulent transfers. But they are not if they fit within a significant but limited exception that Congress has carved out for legitimate charities.

A Very Helpful Exception

This is important. Your bankruptcy trustee has the power, under many circumstances, to require someone you gave a gift to within the two years before filing bankruptcy to return the gift, not to you but to the trustee for distribution to your creditors. Imagine a friend, relative, your church, or other charity being ordered to return whatever money or goods you donated! Instead of your good intentions being realized, that money is used to pay the debts you’d hoped to write off.

Our last three blog posts discussed fraudulent transfers, including innocent ones. Generally, giving away something and get nothing, and do so while you’re insolvent (owe more than you own), that’s a fraudulent transfer.  The trustee can force the recipient to return the gift, but not if the gift qualifies for the charitable contributions exception.

The Elements of the Exception

To qualify for this exception the gift must:

  • consist of cash or financial instruments (stocks, bonds, options, and such)
  • be made by a “natural person”
  • be given to a “qualified religious or charitable entity or organization” under certain provisions of the Internal Revenue Code
  • either be not more than 15% of the debtor’s gross annual income during the year of the gift(s), OR, if more than that, “the transfer was consistent with the practices of the debtor in making charitable contributions.”

See Section 548, subsections (a)(2) and (d)(3) and (4) of the Bankruptcy Code.

These elements are mostly self-explanatory but are worthy a bit more explanation.

Cash and Gifts

When you think of donating assets, you may not immediately think of cash contributions. But cash or money in your checking account are certainly assets. They can be the stuff of a fraudulent transfer like any other asset. So cash contributions need to fit this exception to prevent the bankruptcy trustee from going after them.

The Statement of Financial Affairs is one of the main documents you and your bankruptcy lawyer prepare and file. Its question 13 asks: “Within 2 years before you filed for bankruptcy, did you give any gifts with a total value of more than $600 per person?” Its question 14 asks the same about “gifts or contributions” “to any charity?” If you answer “yes” to either one you need to provide details like the recipient’s or charity’s name and address, what and when you gave, and the value. So, cash and gifts are fully covered.

Natural Persons

This charitable contributions exception only applies to people, not to corporations or other business entities.

However, if you own a sole proprietorship that is not a separate legal entity and can’t file its own bankruptcy. Your business and personal debts and assets are all together, not legally distinct. So, the business’ charitable contributions are effectively contributions by you, a qualifying natural person.

Qualified Religious or Charitable Organization

Money given to help support a friend or a relative, one to whom you owe no legal obligation of support, does not qualify.

Nevertheless, frankly, practicalities may very well prevent a trustee from bothering to pursue such a friend or relative. The person may be very difficult to collect from if the money is gone and he or she is insolvent. A trustee has to seriously consider what it would cost to collect the money and the risk of never collecting. Often the money is not worth pursuing.

15% or “Consistent with the Practices of the Debtor”

Relatively few people in financial trouble have been lately donating anywhere close to 15% of their gross annual income to charity.  And even in the rare circumstances when they do donate more, those donations still qualify if making such donations reflected the debtor’s charitable giving practices.  Except in very unusual circumstances would this element disqualify any charitable donations from the exception.

Conclusion

Most payments in cash and financial instruments to genuine charitable organizations will not be fraudulent transfers. However, if you’ve made any significant charitable contributions in the last two years, review them carefully with your bankruptcy lawyer. Given the very awkward consequences if they don’t qualify for the exception, you want to make sure.

 

Avoiding the “Preference” Problem

April 17th, 2017 at 7:00 am

Prevent your trustee from giving you a big headache if you paid a debt to a friend or relative during the year before filing bankruptcy.  

 

In our 3 blog posts last week we explained “preferences” in bankruptcy. In particular, in our last one on Friday we showed how a “preference” claim by your trustee could cause you a significant problem. Doing something seemingly sensible before filing bankruptcy could cause trouble during your bankruptcy case. Today is about how to avoid that trouble.

Avoid the Risk of a “Preference”

A “preference” is a payment you make to one creditor in preference to your other creditors when you’re on the brink of filing bankruptcy. Specifically, it only involves payments made during the 90-day period before that filing. That period expands to the full year before filing if the creditor you pay is a friend, relative, or business associate.

Those 90-day and 1-year look-back periods are fixed, non-extendable. There is a straightforward way to take advantage of this. Just don’t pay anything you owe to a favored creditor during these periods of time. If you owe anything to a friend or relative, don’t pay them anything if there is any possibility that you’ll be filing bankruptcy in the following year. And don’t pay any other favored creditor during the 90-days before filing.

Otherwise you risk that your bankruptcy trustee will require the person you paid before filing to “return” that money to the trustee after you file bankruptcy.

The Realities of Life

There are situations that simply not paying that favored creditor is not that simple.

First, you may feel great pressure to make that payment. You owe some money to a relative who really needs you to pay some or all of it back. He or she trusted you and you feel duty-bound to show that you are trustworthy. Or your friend that you owe really needs the money now. Or you may want to pay in order to avoid including that debt in your bankruptcy case. You may not want to legally write off that debt. You may want to avoid having that friend or relative ever knowing about your anticipated bankruptcy filing. So if you are able to pay, it can be hard not to.

Second, you often don’t know whether and when you are going to file bankruptcy. Most people put it off because they understandably hope that they can avoid it. So being told to not pay a personally important debt in the one-year or 90-day periods before filing can be quite impractical advice.

Maybe sometimes, but not always. Just because you hope not to file bankruptcy, and don’t know when you will if you do, doesn’t mean you don’t know when you’re in financial trouble. If you are, be very cautious about paying a debt to a friend or relative. If you realize that doing so can cause you and the other person a major headache, you may find a better alternative.

Getting Advice

Your bankruptcy lawyer can hugely help in this. You can find out whether it is your best interest to be filing bankruptcy, now or in the near future. You can find out the best solution for dealing with your special creditor.

People understandable avoid seeing a bankruptcy lawyer until they feel that they have to file a bankruptcy case. But that is often not wise, because often the sooner you get advice the better. There are usually ways of meeting your needs that you didn’t realize. As the saying goes, knowledge is power. That’s true about your financial life in general, and in avoiding a possible “preference” as well.

Delay the Bankruptcy Filing

If you’ve already made a preferential payment, it may be worth waiting before filing bankruptcy. As mentioned above, those 90-day or 1-year look-back periods before filing your bankruptcy case are fixed. If you paid your grandmother $1,000 360 days ago when you got your tax refund, it’s usually easy enough to wait a week before filing so that payment is not within the year before filing. Then it’s not a “preference” and won’t be a problem.

If it isn’t already obvious, it’s crucial to be honest and thorough with your lawyer about any such payments you made. It’s easy to not think of debts to friends or relatives are real debts, them as real creditors. You may have paid in something other than money. Frankly, it may seem sensible to just pretend it didn’t happen.

But if you’re up-front with your lawyer there are usually solutions much better than not telling the truth. For example, most payments to creditors, including favored creditors, do NOT qualify as a preference. There are a number of elements that must be met for a payment to be legally a “preference.” See our blog post of a week ago for more about that. You may be worried about something not worth worrying about. There are many parts to your financial life and a good lawyer will help you find the best way to meet your goals.

You want to avoid creating a “preference.” Get legal advice so that you can do so and not worry about this.

 

Understanding “Preferences”

April 10th, 2017 at 7:00 am

Your trustee might be able to require a creditor to pay the trustee money you’d paid the creditor. Sometimes that’s good; sometimes not. 


What’s a Preference in Bankruptcy?

Preference law allows a bankruptcy trustee to require a creditor that you paid during a certain period of time before you file bankruptcy, under certain conditions, to pay that money “back” to the trustee. The creditor you paid, voluntarily or not, would have to give up that money. The trustee would then take and divvy up the money among all the creditors. Your creditor may or may not get any of that distributed money. It would usually get either none or just a small percentage of what it had to give up.

Section 547(b) of the U.S. Bankruptcy Code lays out the 5 elements of a preference. It’s a payment paid or asset transferred:

  1. to a creditor
  2. for a debt owed before that payment was paid or transfer was made
  3. made while the debtor was insolvent
  4. during the 90 days before filing bankruptcy—or during the year before filing for special creditors
  5. that gave the creditor more that it would have received in a distribution in a Chapter 7 liquidation at the time of the payment or transfer.

More about these elements in the next couple of blog posts.

The Purpose of Preference Law

What could be the point of all this? Why make a creditor who you paid before filing bankruptcy have to pay that same amount of money back, but to your trustee, after you file bankruptcy?

First, it’s supposed to discourage creditors from being overly aggressive in collecting debts. Instead of fighting to get the last dollar out of a debtor, they may work more cooperatively. Otherwise if they force a debtor into bankruptcy they could lose the money collected. Less aggressive creditors may result in less debtors being pushed into bankruptcy. Creditors have a disincentive to pushing debtors into bankruptcy if they know that any money they get on the brink of bankruptcy may have to be turned over the bankruptcy trustee.

Second, preference law is supposed to discourage debtors in financial trouble from paying only one special creditor to the detriment of their remaining creditors. You may hesitate to pay a favorite creditor before bankruptcy if that creditor would just have to “return” it to your trustee later.

Both of these are designed to promote one of the most important principles of bankruptcy law. That’s the fair and equal treatment of creditors—no favoritism for any particular creditor(s). Preference law is intended to discourage behaviors favoring a select creditor or two shortly before a bankruptcy filing. Both an aggressive creditor and a favorite-paying debtor result in a debtor’s very limited money going to a select creditor.

How Can Money Paid BEFORE Filing Bankruptcy Be Affected?

How can bankruptcy law unwind payments that were made before the bankruptcy case was filed? Bankruptcy does mostly focuses on your financial condition at the time your case is filed. (As well as after your case is filed in the case of Chapter 13.) But it also does have the power to look backwards in time to address certain perceived abuses that may occur. This preference law is one example.

Good and Bad Preferences

In our first sentence above we said that a preference is sometimes good and sometimes not. Having your bankruptcy trustee get back a payment you made to a creditor may be good. It would be good if you don’t mind that creditor’s payment being undone and perhaps be put to better use. It would be bad if the trustee was making a creditor return a payment that you’d prefer that creditor to keep.

Let’s look at these two kinds of preferences in our next two blog posts. We’ll start in a couple days with the kind you want to avoid.

 

The Bankruptcy Judge, U.S. Trustee, and Chapter 7 and 13 Trustees

January 16th, 2017 at 8:00 am

Your bankruptcy case makes more sense if you know the roles of the people involved, including the judge and the various trustees. 


The Bankruptcy Judge

A judge is assigned to each bankruptcy case. However, in both Chapter 7 and Chapter 13 cases you will not likely ever see him or her.

In a very straightforward Chapter 7 case, the judge actually has very little to do. He or she tends to get actively involved only if a dispute needs resolution.

In a Chapter 13 case, the judge is much more directly involved. The judge oversees the approval of your payment plan and resolves any disagreements about it. There are often other developments during the course of your case that the judge would need to adjudicate.

Bankruptcy judges are appointed to terms of 14 years. This is unlike regular federal district court judges who are appointed for life. Bankruptcy judges are technically just “judicial officers of the United States district court.” 

The U.S. Trustee

This is someone else who generally flies under the radar in most bankruptcy cases. This office is the mostly behind-the-scene enforcer within the bankruptcy system. Its website describes its role:

The United States Trustee Program is a component of the Department of Justice that seeks to promote the efficiency and protect the integrity of the Federal bankruptcy system.  To further the public interest in the just, speedy and economical resolution of cases filed under the Bankruptcy Code, the Program monitors the conduct of bankruptcy parties and private estate trustees, oversees related administrative functions, and acts to ensure compliance with applicable laws and procedures.  It also identifies and helps investigate bankruptcy fraud and abuse in coordination with United States Attorneys, the Federal Bureau of Investigation, and other law enforcement agencies.

Accordingly, an important job of your bankruptcy lawyer is to avoid you ever needing to hear from the U.S. Trustee!

The Chapter 7 Trustee

You will personally meet your trustee if you are filing a Chapter 7 case. That meeting—at the so-called “meeting of creditors”–will usually not last for more than 5 or 10 minutes.

The Chapter 7 trustee’s job is mostly to determine if you have any assets which are not “exempt”. This means not protected from your creditors. The trustee does this partly by presiding at your “meeting of creditors” about a month after you file your case. In most cases, everything you own IS “exempt.” So the trustee usually makes that determination, which largely ends his or her role in the case.

In the minority of cases in which some of your assets are not “exempt,” your Chapter 7 trustee will have a right to take possession of them, sell them, and distribute the sale proceeds to the creditors. This distribution is based on a schedule of payment priorities among the different legal categories of your creditors.

A Chapter 7 trustee is assigned to your case by the U.S. Trustee from a “panel” of local Chapter 7 trustees. Some trustees in that panel may be more aggressive about pursuing debtors’ assets than others. Your lawyer theoretically cannot influence which trustee you get, but there sometimes are tricks of the trade that can help.

The Chapter 13 Trustee

This trustee is closely involved in your case from its beginning to its end. Because there is usually only one “standing” Chapter 13 trustee assigned to any particular geographic area, your attorney will know in advance who it will be (unlike with Chapter 7 trustees).

The Chapter 13 trustee is usually assisted by a staff lawyer or two and a number of other employees. These people review the Chapter 13 payment plan you and your lawyer propose. The trustee or his or her attorney presides at your “meeting of creditors.” The trustee may raise objections to your payment plan with the bankruptcy judge.

Then once the judge approves a plan, the trustee receives your plan payments and distributes them to the creditors as designated under your plan. The trustee can also file motions at court if you do not make payments as required by your plan. He or she can raise other concerns with the court.

The trustee also tells the court when you have successfully completed all your plan requirements. Then the court can discharge (write off) your remaining debts and close your case.

The Chapter 13 trustee has a number of different roles, some of which are partly inconsistent. His or her task is to maximize how much you pay your creditors but at the same time genuinely wants you to complete your case successfully and to some degree may work with you to that end. Different Chapter 13 trustees juggle these conflicting roles differently. So talk with your lawyer about when you should treat your own trustee as a friend or as a foe.

 

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