Transferring Property Before Bankruptcy Can Be A Bad Idea

Modern bankruptcy laws permit the debtor to keep certain property necessary to maintain a modest standard of living. These laws, called exemptions, protect property from collectors so that the debtor has a reasonable chance at a fresh financial start after bankruptcy. However, while these protections afford the honest debtor a fresh start, some individuals try to get a head start by transferring property in an attempt to hide it from the bankruptcy process. As you can guess, concealing assets from the federal bankruptcy court is a bad idea. 

Section 548 of the Bankruptcy Code endows the bankruptcy court trustee with the power to undo a fraudulent transfer made within two years of the bankruptcy filing. Fraudulent transfers include any transfer made with the intent to hinder, delay, or defraud creditors; or transfers made while the debtor is insolvent which do not involve a fair value exchange. While the lookback period is set at two years by section 548, another section of the Bankruptcy Code (section 544) permits the trustee to apply state law to undo a fraudulent transfer. In many cases the state law lookback period is longer than two years. 

There is generally no issue if you have sold property and received a fair price. However, if you have transferred property in a less than honest fashion, the transfer may be undone. For instance, if you sell your car worth $5,000 to your brother for $500, and then file bankruptcy two months later, the trustee may seize the car from your brother and sell it to pay your creditors. Likewise, deeding jointly owned real estate to a non-filing spouse prior to filing bankruptcy can create a thorny legal dilemma.

 Every individual bankruptcy case must include a Statement of Financial Affairs which asks the debtor to list all property transferred within two years before the bankruptcy filing. It is important to answer this question honestly, and to discuss any recent property transfer with your bankruptcy attorney. 

If you are considering bankruptcy, consult with an experienced bankruptcy attorney and discuss your legal exemptions. In many cases your attorney can legally protect your property without the need to sell or transfer. Your attorney can advise you on the best course of action to protect your property and restructure your financial obligations.

When Paying Your Debts Can Cause Trouble

Many tough decisions are made when a family is struggling with debt.  Often debts are paid according to priority.  Those bills at the lowest priority may not get paid at all.  While this may be a good strategy under ordinary circumstances, it may back-fire when a bankruptcy is imminent. 

The act of paying one creditor while ignoring another is called a preference payment by the bankruptcy laws.  The debtor preferred to pay one creditor and not others.  A preference payment is defined as a transfer of money made before a bankruptcy filing, to pay on a pre-existing debt, made while the debtor is insolvent, and gives the creditor more than it would receive from the liquidation of the debtor’s assets during a Chapter 7 bankruptcy. 

In deciding who should get paid first, the Bankruptcy Code divides creditors into classes and creates a hierarchy of preferences.  For instance, the Bankruptcy Code prefers that child support is paid before credit cards, and that a secured car payment is paid before a medical bill.  In many cases a pre-bankruptcy preference payment is perfectly fine; in other cases it can create trouble for the debtor and the creditor.  This is especially true when one creditor in a class receives more than other creditors in the same class, or a creditor in a lower class receives money before creditors in higher classes. 

When a preference payment occurs within 90 days of the bankruptcy filing, the bankruptcy trustee can ask the court to order the preferred creditor to turn over the payment(s) for distribution according to the hierarchy of preferences.  This period is increased to one year if the creditor is an “insider” creditor.  An “insider creditor” is generally a relative, business partner, etc. who has a special relationship with the debtor. 

Common preference payment scenarios include:

1. Repaying a personal loan from a family member just before filing bankruptcy;
2. Paying one business vender, while ignoring others.
3. Transferring a credit card balance from one card to another.
4. Paying off a credit card, medical bill, or personal loan just before bankruptcy. 

When the trustee requests turnover of a preference payment, the creditor is faced with either complying with the request or litigating the matter in bankruptcy court.  There are legitimate preference payment defenses which largely depend on the circumstances of the payment.  However, the general practice of bankruptcy trustee is to sue first and ask questions later. 

If you are struggling financially, seek out legal advice early and avoid making mistakes with preference payments.  An experienced bankruptcy attorney can help you make wise financial decisions and avoid preference payment situations.

Law of Unintended Consequences Hurts Big Banks

In 2004 and 2005, the banking industry spent millions lobbying for tougher bankruptcy laws.  Washington Mutual, Bank of America Corp., JPMorgan Chase & Co. and Citigroup Inc. collectively spent $25 million during that period.  The big banks’ efforts paid off in a major overhaul of the Bankruptcy Code in 2005 making it more difficult for struggling families to discharge credit card debt.  However, the banks did not foresee the current housing crisis, and new research suggests that the 2005 changes to the Bankruptcy Code may have caused mortgage default rates to rise. 

A paper published by the National Bureau of Economic Research states that the 2005 changes “raised the cost of filing and reduced the amount of debt that is discharged” thereby making it more difficult for debtors “to shift funds from paying other debts to paying their mortgages[.]“  In other words, before the 2005 changes, many debtors struggling with a mortgage arrears and credit card debt could file bankruptcy, discharge the credit card debt, and free-up money to pay the mortgage.  The new bankruptcy provisions make this process more difficult.  As a result, fewer debtors are able to afford to save their homes through the bankruptcy process. 

Jay Westbrook, a professor of business law at the University of Texas Law School in Austin and a former adviser to the International Monetary Fund and the World Bank said, “Be careful what you wish for.  [The banks] wanted to make sure that people kept paying their credit cards, and what they’re getting is more foreclosures.” 

If you are facing overwhelming debt and want to keep your home, there are many alternatives available to you.  An experienced bankruptcy attorney can review your finances and explain your legal options for discharging or repaying your debts.  Bankruptcy is not the only option for saving a home from foreclosure, and many cases are successfully resolved using a combination of bankruptcy and non-bankruptcy methods.  Get the facts today and solve your debt dilemma!

Debt Collection and Your Rights

Debt collectors can be ruthless. Persistent telephone calls at home and work, embarrassing letters in red envelopes, calls to friends and family, and even public posts to your Facebook account are all dirty tactics that debt collectors employ to harass you into paying. Fortunately, there are laws that protect you from unlawful creditor harassment. 

The Fair Debt Collection Practices Act, or FDCPA, is a federal law that protects against abusive collection practices by third party collectors. Third party collectors include collection agencies and collection attorneys. The FDCPA does not apply to business debts or to original creditors. The FDCPA prohibits certain abusive practices including: 

*  Telephone calls before 8 a.m. or after 9 p.m. (your time);

*  Requesting payment beyond what is actually owed;

*  Using abusive, profane or obscene language;

*  Threatening legal action which is not permitted by law (e.g. criminal action);

*  Telephone calls at work after being instructed that your employer prohibits phone calls from debt collectors;

*  Contacting you directly after being instructed that you are represented by an attorney 

Another federal protection is the Fair Credit Reporting Act (FCRA). The FCRA is designed to promote accuracy and ensure the privacy of the information used in consumer credit reports. The FCRA contains a dispute process for correcting inaccurate information placed on your credit report.  More information about the Fair Debt Collection Practices Act and the Fair Credit Reporting Act can be found on the Federal Trade Commission’s Bureau of Consumer Protection website.  The FTC is charged with enforcement of both acts. 

Hiring a bankruptcy attorney provides immediate relief from creditor harassment under the FDCPA, and all collection action must cease the instant you file a bankruptcy case. This protection lasts the duration of your bankruptcy and is replaced with the bankruptcy discharge at the end of your case. A creditor who violates these bankruptcy prohibitions can face a contempt of court charge in the federal bankruptcy court. 

Don’t let creditor harassment overwhelm your life. Take charge by consulting an experienced bankruptcy attorney about your debt and learn how the federal and state laws can protect your property, your income, and your peace of mind.

Do I Have To List It In My Bankruptcy?

A common question from clients preparing to file bankruptcy is, “Do I have to list it?” “It” can be an item of property, a financial obligation, a source of income, or even a reoccurring bill. The simple answer is, “Yes!” You must list all of your assets, debts, income and expenses. The bankruptcy process expects and relies on honest disclosures from the debtor. These financial disclosures are made under oath and threat of perjury. You must disclose everything. 

Disclosing ownership of an asset doesn’t mean you will lose that property. Statistically, only four percent of all Chapter 7 bankruptcy cases have an asset that is turned over to the trustee. Federal and/or state exemption laws protect most property during bankruptcy, however property exemptions are only recognized when the asset is listed and the legal exemption is properly claimed. An asset that is concealed during your bankruptcy case will not receive the full protection of the exemption laws. 

Likewise, disclosing income does not mean that you will be forced into a Chapter 13 repayment case. Most debtors pass the means test without much effort. In the remaining cases, most only require small adjustments. Disclose all of your income early during the bankruptcy process, and your attorney can discuss your legal options for discharging unsecured obligations without filing a Chapter 13 repayment case. 

Intentionally failing to disclose a debt means that the debt is not discharged. Unfortunately, it also means that you have committed perjury since you attested to having listed all of your debts. Perjury is a federal crime, and you may be denied a discharge. Occasionally a debtor wants to omit a creditor from the bankruptcy case. Your attorney can help you with this decision. For instance, a credit card with a zero balance is not a debt and there is no disclosure requirement. In theory, since the credit card company is not listed as a creditor, it does not receive notice of the bankruptcy, and the credit relationship is not disturbed. Realistically, the credit card company will discover the bankruptcy independently and may restrict the account. 

When it comes to bankruptcy it is important to be completely honest with your attorney. Your attorney can advise you on making the best disclosure decisions while staying within the legal requirements of the bankruptcy laws. Don’t hide a financial fact! Discuss it with your attorney and protect your legal rights.

Redeeming a Vehicle During Chapter 7 Bankruptcy

Redemption is a process during a Chapter 7 bankruptcy case where a debtor is able to retain a vehicle by paying the secured creditor the value of the vehicle, not the total debt that is owed.  For example, if you owe $15,000 to Ford Motor Credit, but the car securing the debt is only worth $10,000, you can use the redemption process to pay only the value of the vehicle ($10,000), keep the car, and discharge the remaining unsecured debt ($5,000). 

Redemption is only available to those debtors who are able to pay the entire value in one lump sum.  So in our example above, after the bankruptcy court approves the redemption, Ford Motor credit must receive the entire $10,000.  Payments are not allowed.  While this may appear to be an insurmountable obstacle, the truth is that there are several financing sources available to you.  Some finance companies specialize in providing loans to debtors in bankruptcy, including 722 Redemption Funding and Fresh Start Loan Corporation.  Experienced bankruptcy attorneys are very familiar with these companies and other finance sources. 

The process for obtaining a redemption auto loan is very similar to qualifying for a traditional loan.  Finance companies require a loan application and assurances that you will be able to repay the loan (e.g. steady employment, reasonable debt to income ratio, good payment history, etc).  The interest rate can be high for a redemption loan; however the resulting monthly payment is often lower than the original monthly payment.  

If you are interested in lowering your monthly payments through the redemption process, discuss your options with your attorney.  It is important to carefully consider all of the advantages and disadvantages before making a decision to redeem a vehicle.  Some of the advantages of a redemption loan are:

• Retention of the vehicle;
• Vehicle is no longer “upside down;”
• The creditor cannot repossess the vehicle;
• Usually results in a lower monthly payment. 

The main disadvantage of a redemption loan is:

• High interest rate 

Redemption is not the only option for keeping a vehicle after a bankruptcy.  A skilled bankruptcy attorney can explain all of your options and help you obtain the best deal for you and your family.