Posted by on September 4, 2016 under Bankruptcy Blog | 
Paying Your Favorite Creditor Before Filing Bankruptcy
Although bankruptcy law fixates on what you own and who you owe at the moment your bankruptcy case is filed, there are some important ways that the law can look into the past. “Preferences” are an example where the bankruptcy system can potentially look into and upset a certain limited piece of your past.
If during the 365 days before you file a bankruptcy you pay what is termed an insider creditor (90 days if not an insider creditor) more than you are paying at that time to your other creditors, then after you file bankruptcy that favored creditor may be required to give to your bankruptcy trustee the money that you had paid to this creditor. So for example, if you paid your mother $1,000 to pay off a debt you owed her, and then six months later filed a bankruptcy case, your trustee could likely require her to pay that $1,000 to the trustee. Mom certainly is not going to be happy about that especially if she already spent the money. That $1,000 would then be divided by the trustee among your creditors as prescribed by law (with your mother likely getting just a tiny portion of it, based on her pro rata share of all your debts).
That $1,000 is called a “preference” or a “preferential payment,” which the trustee can undo, or “avoid.” You are considered to have paid that creditor in “preference” to your other creditors.
The Good News—It’s Preventable
This mess can be avoided altogether if you get legal advice from an experienced bankruptcy attorney before you make the preferential payment(s) to your favored creditor. Or even if you’ve already made the payment(s) by the time you see your attorney for the first time, there are often ways to get around it.
Careful, though, because the law about preferences is complicated. Section 547 of the Bankruptcy Code on preferences is a head-scratcher. It’s about 1,300 words long, containing 56 sub-sections and sub-sub-sections. Take a look at it and you’ll see it’s certainly not clear.
What is clear that if there is any chance that you may be filing a bankruptcy case within a year, before paying anything to a relative, friend, or any other special creditor that you feel obligated to pay, talk first to an experienced bankruptcy attorney. Especially do so if you figure this does not apply to you because you don’t consider the person you are paying to be a “real” creditor—because it’s a “personal debt,” was never put into writing, or nobody knows about it.
And most importantly, if you’ve already made such a payment before you see your attorney, absolutely be sure that you disclose that to him or her, and do so right away, early at the first meeting. It could well affect your game plan, and maybe the timing of your bankruptcy filing.
Posted by on August 10, 2016 under Bankruptcy Blog |
Words I hate to tell new clients: “If only you’d come to talk with me sooner.”
Consumer bankruptcy attorneys are in the business of helping people put back in order their financial lives. Many times we succeed which makes the practice personally gratifying. However, life is not perfect and some situations are beyond reach even with the strong medicine of bankruptcy. Difficult choices sometimes have to be made.
But the toughest situations are those in which the person took some action—usually not long before seeing me—which may have made some sense at the time but ended up being a mistake, a self-inflicted wound.
The goal of my next few blogs is to help you avoid these.
Here’s what we will be covering.
1) Preferences: If within a certain amount of time before filing bankruptcy, a debtor pays any significant amount of money (or anything else of value) to someone she owes, the bankruptcy trustee could under certain conditions force that creditor to pay to the trustee whatever amount the debtor paid to the creditor. That creditor could be a relative or friend who had lent the debtor money, and the debtor felt a deep obligation to repay it before filing bankruptcy. This relative or friend could be sued by the trustee to make him or her “return” the money (but to the trustee, not to the debtor).
2) Wasting exempt assets: New clients constantly tell me how they’ve borrowed against or cashed in their retirement funds in a desperate effort to pay their debts. Or they’ve sold a vehicle or some other precious asset. Then they learn that whatever they’ve sold or borrowed against would have been completely protected in their subsequent bankruptcy case. And the debts they paid with the proceeds would simply have been “discharged” (legally written off) in that bankruptcy. They have lost something of significant value in effect for no real benefit.
3) Surrendering a vehicle that could have been saved: People often really need a vehicle but owe on it more than it is worth and can’t afford the payments. So they either voluntarily surrender it to the creditor, or wait to file bankruptcy until after it gets repossessed. Instead with a “cramdown,” they could well have been able to keep that vehicle by paying much lower monthly payments and paying much less for it overall.
4) Letting a creditor sue and take a judgment: If a debtor is sued by a creditor and waits until after a judgment is entered, in some situations, that judgment could make the debt harder to discharge in a subsequent bankruptcy case.
5) Selling a home out of desperation: Bankruptcy—and especially Chapter 13—provides some amazing tools for dealing with debts related to a home, including the first mortgage arrearage, the second mortgage lien, judgment liens, income tax and child support liens, and other liens of all sorts. Homeowners may hurriedly sell their home because of pressure from any of these kinds of creditors. But if they do so, they could lose out on the opportunity to hold onto their home by saving tens of thousands—or possibly even hundreds of thousands—of dollars. Or at least they could likely sell it at a higher price with more market exposure and/or sell it when the timing is better for their family.
As you can see, doing what seems right and sensible can really backfire if you don’t get legal advice about these kinds of unexpected consequences. In the next few blogs I explain these in more detail so that these mistakes will make sense to you and you can avoid them.
Posted by Kevin on July 11, 2012 under Bankruptcy Blog |
In bankruptcy it’s okay to FEEL differently towards some creditors than others. You can also sometimes ACT differently, but only if you very carefully follow the rules.
OK. You are in financial difficulty. You may or may not even have thought seriously about bankruptcy, however. You have lots of creditors and a small amount of money. Some of those creditors are family members- and you have to take care of them. Others are people that you do with business. You would like to take care of them because you want to keep up that relationship. Are there any hidden land mines if you bankruptcy after paying back your cousin, Vinnie, of your main supplier?
The problem with favoring certain creditors is that doing so flies in the face of one of the basic principles of bankruptcy law—that creditors which are legally the same should be treated the same. Mostly that applies to how creditors are treated DURING the bankruptcy case itself. But in certain limited but crucial ways this principle spills over into the time BEFORE your case is filed. Payments you made to a creditor can be undone—the creditor can be forced to pay to the bankruptcy trustee whatever you paid to the creditor within a certain period of time before your bankruptcy filing.
The practical consequences of this can be devastating. You make a special effort to pay someone that you care about, likely when you don’t have much money, only to later risk having your bankruptcy trustee make that person pay that money “back,” not to you but rather to the trustee. Since this can happen long after you paid that creditor, the money you paid probably has long ago been spent, often leaving that creditor scrambling.
If you pay a creditor not long before filing the bankruptcy case, the theory is that you “preferred” that creditor over others. The inappropriate payments are called “preference payments,” or simply “preferences.” The idea is that had you not made those payments, there would have been money to distribute to the creditors overall.
So what are the rules about this so that one can avoid them? If you’d like very effective sleep-inducing bedtime reading, here is Section 547 of the Bankruptcy Code explaining preferences. Nearly 1,400 words, in 57 subsections and sub-subsections!
But the good news is that the basic rule is both reasonably straightforward and often easy to work around if you understand it. So here it is. A preference is a payment (usually money, but it can be any asset) made (voluntarily or involuntarily such as a garnishment) on a prior debt to a creditor (anybody to whom you legally owe money) during the period of 90 days before the filing of a bankruptcy. That period of time stretches out to a full year before filing for payments made to “insiders”—basically relatives, friends, and business associates.
So how do you work around this? Well, if you know about the rule in advance, you avoid paying creditors you care about during those 90-day and 1-year periods before filing, whichever is applicable. And if you’ve already made those payments, you avoid the problem by waiting to file long enough to get past those time periods.
There are other aspects that make this easier than it might sound. Payments to most secured debts (on your home, vehicle) don’t count. The trustee can’t chase payments to a single creditor totaling less than $600 in the case of a consumer debtor or less than $5,000 for a business debtor. And there are various other exceptions.
The bottom line is that overall it’s dangerous to pay creditors who you feel a special loyalty to before filing bankruptcy. The basic 90-day/1-year rule is rather simple, but it has lots of twists and turns so it’s safer to just avoid the issue whenever possible. Often it’s better to wait until after you file your bankruptcy case to pay these people. That’s the subject of the next blog.
