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.

The purpose of the discharge injunction is to provide the debtor with a fresh financial start, free of the pressures of former debt.  Violation of the bankruptcy discharge is a serious matter.  A willful violation of the discharge injunction constitutes contempt of court.  The violator (often called the “contemnor”) may be penalized for this conduct, including a hefty fine and payment of attorney fees.  

Recently United States Bankruptcy Court Judge Enrique S. Lamoutte discussed the liability of a creditor that sold a discharged debt and the subsequent purchaser attempted collection action.  This is practice is often referred to as “zombie” debt collection.  The debt is legally “dead,” and the collector attempts to “bring it back to life” through direct collection efforts. 

In the case of Laboy v. FirstBank Puerto Rico, Judge Lomoutte reminds creditors that they “are obligated to maintain procedures to ensure that they do not violate [the discharge injunction], and may be held liable for damages and attorney’s fees if they do not.”  He concluded that FirstBank had knowledge of the bankruptcy filing and discharge and that its actions in selling the debt to a debt collector some 15 years after the bankruptcy discharge violated the discharge injunction.  

If you receive contact from a debt collector concerning a discharged debt, notify your bankruptcy attorney immediately.  This may be an innocent error, or it may be a zombie debt collector on the prowl.  Either way, you should contact your bankruptcy attorney and chase these zombies debts back to the grave!

The Meeting of Creditors (also called the “Trustee’s Meeting,” the “Creditors’ Meeting,” or the 341 Meeting (after section 341 of the bankruptcy code which requires the meeting) is held between 20 and 40 days after your bankruptcy is filed.  The bankruptcy court schedules the meeting and mails notices to all of your creditors.  However, the bankruptcy judge is prohibited from attending the meeting.  Since there is no judge, the Meeting of Creditors is not a judicial proceeding.  

The bankruptcy trustee is required examine you under oath and investigate your financial affairs.  The trustee then submits a report to the bankruptcy court and Office of the U.S. Trustee.  The trustee is also required to ask specific questions, including: 

Did you read your schedules before signing them?

Did you list all of your assets?

Did you list all of your debts?

Are your schedules accurate or do you need to make any corrections?

Do you have a domestic support obligation? 

The trustee may also have specific questions concerning your schedules which may involve your assets, income, expenses, debts, or financial transactions.  Your attorney will be present with you to assist you during this examination.  The trustee may also require that you provide information or documents before, during or after the meeting including bank statements, pay stubs, tax returns, vehicle titles, and land ownership and debt documents.  Finally, you are required to provide proof of identity including social security number and a government issued photo I.D. 

Despite the name, the Meeting of Creditors is generally a meeting that no creditors attend.  For most national creditors like Ford Motor Credit or Capital One it is not cost-effective to attend these meetings.  Because the trustee conducts dozens of these meetings on the same day, any creditor questions are limited to only a few minutes.  If the creditor needs additional time, it can ask the bankruptcy court to order the debtor to appear for a further examination between just the creditor and the debtor at a later date. 

Many bankruptcy debtors are very nervous going into the Meeting of Creditors, but soon realize that it is just a procedural formality.  Your bankruptcy attorney will assist you during your meeting, and can answer any questions concerning the Meeting of Creditors or the bankruptcy process.

The answer to this question is very simple: “Yes!”  You must list all of your debts and each of your creditors, even those you intend to repay.  There are two ways to repay a debt after bankruptcy.  The first is by voluntary payment.  The second is with a reaffirmation agreement. 

Voluntary payments made after your bankruptcy discharge neither create a new legal obligation nor invalidate the discharge order.  Any payment you make on a discharged debt is the result of a moral obligation since the legal obligation to pay the debt has been discharged by the bankruptcy court.  The creditor is still prohibited from contacting you or trying to collect on the debt. 

A reaffirmation agreement is a new contract between you and your creditor.  It is fully enforceable after the bankruptcy, so if you default on the obligation the creditor can sue you and repossess any property securing the agreement.  Reaffirmation agreements are commonly used to continue auto and home loans.  The debtor agrees to continue the legal obligation to pay the loan, and the lender agrees to not repossess the collateral.  

Reaffirmation agreements are only available to Chapter 7 debtors and the agreement must be executed before the bankruptcy discharge is entered.  The debtor can revoke the agreement with 60 days after the agreement is signed.  The Bankruptcy Code requires that the debtor demonstrate that the paying a reaffirmed debt will not create an undue hardship for the debtor or the debtor’s family.  While a reaffirmation agreement can be used for credit card agreements and other unsecured loans, bankruptcy courts are reluctant to approve these agreements without exceptional circumstances. 

You are free to continue to pay a debt after your bankruptcy.  Congress specified in the Bankruptcy Code that “Nothing contained in. . . this section prevents a debtor from voluntarily repaying any debt.”  There are several legal options for repaying a debt after bankruptcy, as well as several avenues for debt restructuring.  Discuss your specific situation with your bankruptcy attorney and discover your options.

One of the many advantages of filing bankruptcy is that, when your case is filed, you are afforded the protection of the Federal Laws regarding bankruptcy.  The best and most well known provision is the “automatic stay”.  When your case is filed, your creditors are not allowed to contact you or try to collect the debt—they are automatically stopped from these acts.  I like to think of it as they have their arms tied behind their backs.  This gives you a time to breathe, regroup, and get your ducks in a row while your attorney, the trustee and the Judge look at your financial situation and find a solution with your help.

Many people who owe money to their creditors can answer “yes” to one or more of these questions. Owing debts that you can’t pay can become overwhelming, stressful, and add unnecessary pressure to your life.  But ignoring the debt can cost you more in the long run.  Pretending that it doesn’t exist or ignoring it doesn’t make it go away. Filing bankruptcy can stop creditors from collecting debts that they are owed.  Below are a few instances of how filing bankruptcy can help.

IRS Tax Levy/Garnishment of wages or bank accounts – Filing bankruptcy can stop money from being involuntarily taken from your paycheck or bank account.  If a creditor sues you for a debt and gets a judgment against you, then they can execute on that judgment and garnishment may occur.  It is better to file bankruptcy once you are sued rather than waiting until you are being garnished simply because you have full access to your money without restrictions.  

Suspended driver’s license – If you are involved in a motor vehicle accident and are determined to be the responsible party who must pay for damages, then you could be sued by a plaintiff insurance company to pay the debt arising from the accident.  You risk your license being suspended if you don’t pay.  If you bankrupt such debt, you can prevent or have the suspension of your license lifted.

Past due utility accounts – If you are on the verge of having your utilities shut off due to non-payment, chances are you may have other debts that you haven’t paid as well.  Filing bankruptcy can prevent a shut off of your utilities.  You may then have continued utility service and start fresh with a zero balance account. 

Does any of this apply to you? It is always best to seek counsel before things get too far out of control.

Even if you have waited until a judgment has been entered against you or your wages are about to be garnished, you can still file bankruptcy to stop the garnishment and obtain a fresh start … free of debt.

From a credit standpoint, filing for bankruptcy eliminates most if not all of your debt which allows you to begin the rebuilding of your credit. Most individuals can obtain good financing terms on a future loan within two years of filing for bankruptcy so long as their credit score has improved after the filing.

Because the stress can be overwhelming, you should seek the advice of a reputable bankruptcy law firm. They will outline your financial options and help you manage or eliminate your outstanding debt. It’s a great feeling knowing that you will soon be on the road to financial recovery.