What To Do – And What Not To Do – As You Prepare For Bankruptcy
If you are considering bankruptcy, it is important to understand how your actions in the years leading up to the bankruptcy filing can affect the outcome of the bankruptcy case. Fraudulent transfers of property; preferential payments to friends or family members; unexplained losses of assets; and excessive use of credit cards are some of the most common issues that arise in consumer bankruptcies. Consulting with an experienced bankruptcy attorney can help to avoid some of these problems. If you have questions about what to do when filing for bankruptcy or to determine if you are eligible to file for bankruptcy, contact my firm, The Law Office of Andrew M. Doktofsky, P.C., to learn how I can help.
Avoid Preferential Payments To Insiders
If you are considering filing for bankruptcy, it is important that you do not repay friends, family members or business associates for debts owed to them. These types of people are considered “insiders.” Any payments made to them can be recovered by the bankruptcy trustee if the payments were made within one year prior to the filing of the bankruptcy petition. However, such payments can only be recovered if the total repaid amount during the one year period exceeded $600 for a debtor whose debts are primarily consumer debts; or exceeded $6,425 for a debtor whose debts are not primarily consumer debts (i.e. over 50% of the debts are business-related).
According to 11 U.S.C. § 547(b) of the Bankruptcy Code, a preferential payment is defined as:
- Payment on a debt;
- To or for the benefit of a creditor;
- That was made while the debtor was insolvent;
- To a noninsider creditor within 90 days of filing the petition for bankruptcy; or
- To an insider creditor within one year of filing the petition for bankruptcy;
- That allows the creditor to receive more than it would otherwise receive in a Chapter 7 case.
The goal of bankruptcy is to treat all unsecured creditors fairly. Payments made to insiders that are also unsecured creditors, within one year of filing the bankruptcy petition, would be unfair and are considered preferential.
If an individual does make a payment to a family member, friend or business associate, within one year prior to the bankruptcy filing, the bankruptcy trustee will demand a return of the money from the insider who received the payment. If the insider refuses to return the payments to the trustee, the trustee can sue the recipient in the Bankruptcy Court to return the money to the bankruptcy estate.
If repayment was made to an insider, it is possible for the insider creditor to give a new loan to the debtor. This will serve to undo any preferential payments that were made to that insider. However, it is imperative to first consult with an experienced bankruptcy attorney to determine if this is advisable in your particular situation.
Additionally, in Chapter 7 bankruptcy proceedings, a debtor can repay insiders after the bankruptcy petition has been filed. However, this repayment option is only available in Chapter 7 bankruptcy proceedings. In Chapter 13 bankruptcy proceedings, insiders are paid in the same manner as other unsecured creditors through the Chapter 13 plan.
Avoid Incurring Additional Debts Prior To Filing For Bankruptcy
It is also important to refrain from incurring any additional debt in the time period leading up to a bankruptcy filing. This means:
- Do not use existing credit cards;
- Do not apply for new credit cards;
- Do not take out new loans;
- Do not draw from home equity lines of credit or other types of credit lines; and
- Do not take additional equity out of your home.
Under certain circumstances, it may be advisable to obtain financing to purchase a vehicle prior to filing for bankruptcy. However, it is important to consult with a bankruptcy attorney before doing so.
Debtors who incur additional debt in the period leading up to the bankruptcy filing or who incur excessive credit card debt with no intention of repaying it, can face a denial of a bankruptcy discharge for bad faith, according to § 707 of the Bankruptcy Code. Further, according to the Bankruptcy Code, cash advances and luxury purchases may be presumed to be nondischargeable under both Chapter 7 and Chapter 13 bankruptcy proceedings. The following cash advances and luxury purchases are deemed to be nondischargeable under 11 U.S.C. § 523(a)(2)(C):
- Luxury items or services totaling more than $675 that is owed to a single creditor, and purchased in the 90 days prior to the bankruptcy filing, and/or
- Cash advances totaling $950 or more under an extension of consumer credit or open end credit plan, and obtained in the 70 days prior to the bankruptcy filing.
The Dangers Of Making Asset Transfers Ahead Of Bankruptcy Proceedings
Transferring assets prior to filing for bankruptcy can have detrimental consequences:
- Denial of Discharge – A debtor can be denied a discharge in a Chapter 7 bankruptcy if they transferred or concealed assets within one year before the date of the filing of the bankruptcy petition.
- In New York, a bankruptcy trustee can recover fraudulent transfers of assets made within the six-year period prior to the filing of the bankruptcy.
A fraudulent transfer is defined as:
- A transfer of an asset made with actual intent to hinder, delay or defraud a creditor
- A transfer of an asset where the debtor received less than fair value in exchange for the asset and the debtor was insolvent on the date of the transferor became insolvent as a result of the transfer.
The most common scenario involves a debtor transferring their interest in a home to their spouse or child and not receiving any payment in return. It is important to remember that it is not necessary that the transfer be made with the intent to defraud creditors. In fact, there could have been a legitimate reason for the transfer, such as for estate planning purposes. However, in the bankruptcy context, a bankruptcy trustee need only show that the transfer was made for less than the fair value within the six-year period preceding the bankruptcy filing and that the debtor was insolvent on the date of the transferor became insolvent as a result of the transfer. Under these circumstances, a Chapter 7 trustee can bring an action against the recipient of the property to recover the property for the benefit of the debtor’s creditors.
Of critical importance is that once an asset is transferred, the debtor can no longer claim an exemption in the property transferred. For instance, the homestead exemption in Long Island and Nassau, Suffolk, Rockland, Westchester and Putnam counties, is $170,825. This means that a debtor can file a Chapter 7 bankruptcy and keep their home if the equity in their interest in the home does not exceed $170,825 (if the house is jointly owned, the combined equity can be up to $341,650). For example, let’s say a house is owned jointly by a husband and wife. If the ownership of the house was transferred from the two of them to the wife only, and then the husband filed for bankruptcy, the trustee could set aside the transfer, sell the house, and use the proceeds to pay the husband’s creditors. The wife would be paid for her share of the house. This is assuming the husband files for bankruptcy within six years after the transfer. Again, the reason for the transfer is not important. If the husband did not receive fair value for his share of the house, and he was insolvent at the time of the transfer (or the transfer made him insolvent), then it is considered a fraudulent transfer.
The same principles are true for any asset, including motor vehicles, bank accounts, jewelry or other personal property. Keep in mind that “removing your name” from a joint bank account or investment account is generally considered a transfer of one-half of the value of the account. As such, a bankruptcy trustee can recover the amount transferred.
Basic But Critical: Tell The Truth Throughout The Bankruptcy Process
When filing for bankruptcy, it is most important to remember to tell the truth throughout your bankruptcy proceeding. First, you must be honest with your attorney. Your attorney cannot properly advise you unless you are honest and disclose all information. Furthermore, lying under oath on your bankruptcy petition or at the meeting with the bankruptcy trustee, is a federal offense. This can lead not only to a denial of a bankruptcy discharge but also to criminal prosecution. It is imperative to be completely honest and fully disclose all relevant information. You must disclose all assets, including all jewelry (including engagement rings), consumer goods and electronics, motor vehicles, pension and retirement funds and financial accounts.
A common issue is that of “off the books” income. If you are working and earning income or have earned income in the two years preceding the bankruptcy filing, it must be disclosed on your bankruptcy petition. This is true regardless of whether you reported the income on your tax returns or whether your employer withholds payroll taxes from your pay.
If you are paid commissions, you must disclose all sales for which you have a commission pending. Pending sales commissions are considered an asset. The debtor may be able to claim the commission as exempt, depending on the amount of the commission, and whether the debtor is claiming a homestead exemption. (Use of the homestead exemption would restrict the debtor’s use of other exemptions that would exempt commissions.) Or, it might be prudent to delay a bankruptcy filing until after the commissions are received. This will allow the debtor to receive the money and use it for necessary expenses prior to the bankruptcy filing.
Get The Bankruptcy Help And Advice You Need From An Experienced Attorney
Contact The Law Office of Andrew M. Doktofsky, P.C., today for a free consultation about pre-bankruptcy considerations throughout Suffolk County, Nassau County, and Long Island. I am an experienced bankruptcy attorney who will advise you on the proper procedures to follow in order to achieve a favorable outcome in your bankruptcy proceeding. Call 631-812-7712 or email the firm for a free consultation about how to prepare for bankruptcy.
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