Independence from Debt

This 4th of July make your move towards financial freedom.  Get informed. You’ll feel tons better once you know your options.

 

We take this break from our ongoing series of blog posts on secured debts this 4th of July to talk about freedom from debt. 

Your Life Today

If you’re reading this most likely you’ve got some rather serious financial problems. Most likely your debts are overwhelming you, worrying you all the time.

You’ve probably been trying to improve your situation for a long time, likely for years. It’s really affected your life. It hasn’t helped your personal relationships. The anxiety is impacting your health.  It’s hard to feel good about yourself, to be happy or relaxed.

It’s difficult to take care of your basic daily needs, and of those who depend on you. It’s frustrating to think about the long-term responsibilities that you aren’t getting ahead on, like saving for retirement.

What You Need

Financial peace. Financial freedom.

You’d like to be able to afford what’s important to you. You’d like to not be worrying all the time. You’d like to have reasons to be hopeful; you’d like to have a future worth looking forward to.

Take the First Step

You’ve heard the expression that the first step is always the hardest. There’s something about human nature, especially when we’re feeling down, that makes us assume that resolving a problem will be harder than it actually ends up being. We are often pleasantly surprised that once we take the first step the process is not as hard as we had feared. Then afterwards we wish we would have had the nerve to take that first step much earlier and avoid unnecessary grief in the meantime.

So take that first simple but crucial step: find out your legal options about your debts.

From Fear to Practical Options

You find out your options by seeing a lawyer who focuses on helping people like you solve their consumer and/or business debt problems.

This may be easier than you think because asking for this kind of help is usually free, at least to get started. Most lawyers who help people deal with their debts don’t charge for their initial meeting with you.

At this meeting you will have the opportunity to tell the lawyer about your situation, your concerns, and your goals. The lawyer will usually outline your most likely legal options, along with their major advantages and disadvantages.

But Do You Really Get Something for Nothing at that Initial Consultation?

Most lawyers who help consumers and small businesses with debt problems don’t charge for their initial meeting for various reasons.

And sure, it’s partly a marketing tactic. Lawyers hope that once you take the trouble to meet with them you will like them and will more likely hire them if they decide to retain a lawyer.

There’s also the reality that when you are in financial trouble you likely can’t spare the money on shopping for a lawyer. So fortunately most lawyers don’t charge for that chance for you to check them out and get advice from them.

It’s worth mentioning that most of these lawyers actually do care about you and genuinely want to help you. That’s because who get into the field of helping people deal with their debts they get satisfaction from improving their clients’ lives.

So take advantage of their free offer.

Be Picky and Find a Good Match

Just because you have an initial consultation with a lawyer, you have absolutely no obligation to continue working with that lawyer. You are seeking information and advice, and maybe looking for an attorney to help you. After the initial meeting ask yourself the following questions.

Did the lawyer listen carefully to you to get enough information about you and your finances? Did he or she present your options clearly, and answer your questions about them in an understandable way? Do any of the options presented meet your goals?

Was the lawyer considerate, treating you like a human being? Were your concerns heard and addressed directly? Was the lawyer knowledgeable but not overbearingly so? Were you comfortable with him or her? Did you feel he or she was worthy of your trust? Were you and the lawyer a good fit?

But Won’t Lawyers Always Recommend Filing a Bankruptcy Case?

No. That would be contrary to their ethical and legal obligation to you.

Lawyers are strictly required to represent YOU, not to pressure you into any preconceived direction. They must advise you of your options, and the advantages and disadvantages to you, without any regard for their financial self-interest. They can be sued for malpractice for giving bad advice, or could lose their law license. That applies even to free initial consultation meetings.

Furthermore, a lawyer’s job is to lay out the options so that YOU can make an informed decision. The attorney doesn’t tell you what to do; that’s your choice. Yes, his or her job is to advise you, and usually to make recommendations, strongly or otherwise. But not to make decisions for you or to make you do anything. If the lawyer you meet seems to be putting any uncomfortable pressure on you, find another one who respects your appropriate role as the decision-maker.

Take that First Step

Call to set up a consultation meeting with a lawyer who focuses on debt matters. Meet with him or her. You will almost certainly come away from that initial meeting much, much better informed about your options. You will very likely feel much better about being able to find the freedom from debts that you need.

 

Changing Your Mind after Filing Bankruptcy

Why would you change your mind after filing bankruptcy? Can you switch “Chapters” or even get out of bankruptcy altogether?  

 

After starting your bankruptcy case your circumstances could suddenly change. So you may no longer want to be in the bankruptcy case that you’re in.

Getting out of bankruptcy altogether—dismissing your case—is quite easy in a Chapter 13 “adjustment of debts” case. It’s harder with a Chapter 7 “straight bankruptcy” case.

Changing from one Chapter to the other—converting the case—is usually allowed either way: Chapter 7 to 13 and Chapter 13 to 7.

We start today with some reasons why you might want to dismiss or convert. Then in the next two blog posts we’ll talk about how it’s done first under Chapter 7 and then under Chapter 13.  

Why This is Worth Thinking About

Reasons why this conversation is worthwhile:

• Before deciding to file a bankruptcy case it’s smart to know whether you would be able to dismiss or convert your case if something happened to change your mind.

• You’ll better informed and thus likely be more careful when you file a bankruptcy case if you think in advance about situations which might induce you to want to get out of it.

• If your circumstances do change after your case is filed, you’ll understand your options better.

Why Dismiss or Convert?

What kinds of situations would lead to a person to want to get out of a bankruptcy case after filing one?

The situations tend to be different under Chapter 7 vs. Chapter 13. These differences reflect two very practical differences in these two legal options: their length and their likelihood of successful completion:

• most Chapter 7 cases last no more than about 4 months, compared to three to five years for a successful Chapter 13 case; and

• most Chapter 7 cases are completed successfully (at least those where the debtors are represented by an attorney), while a significant portion of Chapter 13 cases are not.

Situations for Dismissing or Converting Under Chapter 7

Under Chapter 7 there’s simply less that can go wrong and a lot less time for your circumstances to change.

The focus is on your assets and debts at the fixed moment in time when your case is filed. So if a careful analysis of your financial situation at that time shows that your case qualifies for Chapter 7, not much should change that.

Here are some unusual situations that can nevertheless arise making you wish you could get out of your Chapter 7 case (and sometimes instead convert to a Chapter 13 case):

• You were unaware at the time your case was filed that you have a legal right to a valuable asset. For example, you might not know that for estate planning purposes your parents’ had earlier secretly deeded their vacation home to you and your siblings.

• Assets are largely fixed as of the date of filing, but under Section 541(a)(5) of the Bankruptcy Code if somebody dies within 180 days of the filing of your case  leaving you as the beneficiary of an inheritance or a life insurance policy, that asset becomes legally accessible to pay your creditors.

• If right after filing your case you have an accident and incur new large medical bills, those new debts cannot be included and discharged (legally written off) in your case since that debt did not exist when your case was filed.

Situations for Dismissing or Converting Under Chapter 13

Under a Chapter 13 “adjustment of debts” bankruptcy there’s a lot going on and usually a lot more that can go wrong than in a Chapter 7 case. The focus is on your financial life not at a fixed moment in time but rather throughout the years of your case.

Your Chapter 13 payment plan specifies out how much and when the various creditors will be paid (if at all). Although often creditors don’t object to the terms of the plan they certainly can, sometimes in unexpected ways. So your proposed plan sometimes has to be changed more than you intended before it’s approved by the bankruptcy judge.

Then you have to comply with the terms of the plan, over the course of the following three to five years. This gives a lot of time for your circumstances to change. Your Chapter 13 plan usually assumes that your income and expenses will stay the same, or else sometimes tries to predict how they will change into the future. Either way, those assumptions come with risk.

Chapter 13 plans can be amended mid-stream. But sometimes the change in your circumstances is so significant that you need to get out of your Chapter 13 case (and sometimes instead convert to a Chapter 7 case). Here are some examples: 

• Your plan is designed around your desire to save your home, but a year or so later you find a job that requires you to move, taking away the primary purpose of your case.

• You file a joint Chapter 13 case with your spouse, but a couple years later you get divorced, totally changing your financial life.

• Or you get married, again greatly changing your financial life.

• Your income gets significantly reduced long-term, so much so that even amending your Chapter 13 plan is not feasible, making you no longer eligible for Chapter 13.

• Or your income gets significantly increased a year into your case; so much so that you become obligated to amend your plan to pay most or all of your debt.

As mentioned above, the next two blogs will be about how to get out of Chapter 7 and then Chapter 13, in situations like these examples.

 

Bankruptcy–A Moral Choice

When is it moral to break your promises to pay your debts?

 

We Humans Are Moral Creatures

Your decision about whether to file bankruptcy could sensibly be just a weighing of its economic costs and benefits.            

But there’s more to life than dollars and cents. Whether in the front of our minds or nagging us in the back of our minds is the very human question: “Is it the right thing to do?”

Our important life choices are often moral ones. They are choices between doing what’s right and doing what’s wrong.

When deciding about bankruptcy you could skip that part of the decision-making process. You could make it a purely economic decision. But there’s a good chance that will leave you at least vaguely unsettled. You’ll likely feel good about the decision only after you believe in your head and heart that filing bankruptcy really was the right thing to do.

How to Make a Good Moral Decision 

1. Know what got you here.

What got you to this point of financial crisis? Over the years you made a bunch of legal commitments to your creditors to pay your debts. What has gotten in the way of you sticking with those commitments? Is there anything you would have done differently, and WILL do differently in the future?

2. Consider the moral costs and benefits of attempting to meet your financial commitments.

Don’t just look at the financial and legal costs and benefits of filing bankruptcy or not doing so—impacts on your credit record, your monthly budget, your present and future debt service.

What are the moral costs and benefits?

To the extent that you continue to struggle to pay your debts, the moral benefit is the one you likely focus on when you think about doing what’s right: you keeping your promises to pay your debts.

But consider the costs if you continue down that route.  Consider the potential detriments to your physical health from working too many hours and from the stress. Consider your emotional health. Consider how the financial pressures affect your marriage and other significant relationships. Consider what responsibilities you have to your children and other dependents, now and in the future. And consider not just financial responsibilities but the time and attention from you that they need. Extend your responsibilities not just to yourself and your family but also to your broader community.

Don’ts just focus on your moral obligation to your creditors. It’s not only appropriate but even necessary to balance that against obligations to yourself, to your spouse, to your kids, and to society in general.

3.  Focus on making a good decision now.

The past and its decisions are in the past. Accept the responsibility to make the best decisions that you can now.

This means facing your situation honestly and realistically. It is normal to be afraid to face tough realities, ones that make you feel embarrassed and even ashamed. Dealing with it challenges your self-image. Find the courage to be honest with yourself.

Avoid avoidance behavior! Otherwise you’re just staying with the status quo by default. That’s very likely not the morally best route. It’s seldom even the economically most sensible route.

4. Get legal advice about your options.

You need to know your available legal options and all the consequences of those options. Only then can you weigh your options and decide on the right thing to do—morally as well as financially.

You can’t make a good decision without knowledge. And you can’t have adequate knowledge about your options and their consequences without the guidance and advice of a dedicated professional who has spent years, day in and day out, dealing with these kinds of decisions.  

Self-education in the law only goes so far. And it’s not nearly far enough to make the right decisions, on your own behalf much less on behalf of anybody else who relies on you.  

Your bankruptcy lawyer is your legal advisor, not your moral one. So he or she will respect that the final decisions are up to you. But he or she is human, too, and recognizes that it’s a tough choice for you. Having counseled many people making these kinds of decisions, your lawyer should be able to help you find moral closure with yours. If not, find one who does.  

5.  Weigh your available options and decide.

Do whatever you know helps YOU make good decisions. Get motivational help from the right people and resources. Get past your embarrassment and talk with people whose advice you value—your genuine friends, and emotional and spiritual counselors. If it helps, write in your journal about it.

Do whatever it takes to focus on the task. Then make the decision and get it done.

 

Consumer Warning: A Scam Targeting Bankruptcy Filers

Watch out for phone calls seemingly from somebody you think you should trust with reliable sounding information, requesting fast money.

 

You Wouldn’t Be Fooled by This

If you get an email written in imperfect English from somebody saying she needs your help to move a huge amount of money out of her African country, and that you’ll get a healthy percentage of that amount if you just provide your bank account information, you probably know better than to respond to that email.

Here’s a part of an email  which is an example of these advance-fee scams, in which you’re invited to send money to a stranger on the promise of some fast money for you:

Dear Beloved Friend,

I know this message will come to you as surprised but permit me of my desire to go into a business relationship with you.

…  my late father came to Cotonou Benin republic with the sum of US$4.2M which he deposited in a Bank her in Cotonou Benin Republic West Africa for safe keeping.

I am here seeking for an avenue to transfer the fund to you in only you’re reliable and trustworthy person to investment the fund. I am here in Benin Republic because of the death of my parents and I want you to help me transfer the fund into your bank account for investment purpose.

Please I will offer you 20% of the total sum of US$4.2M for your assistance. Please I wish to transfer the fund urgently without delay into your account and also to relocate to your country due to the poor condition in Benin, as to enable me to continue my education as I was a medical student before the sudden death of my parent’s. Your immediate response would be appreciated.

But Imagine If…

If instead the following happened you might more likely be fooled:

  • You get a phone call on your cell phone with your screen showing it’s from your attorney’s office, or from the IRS
  • The person on the phone gives you information about one of your real creditors, saying you have to send your attorney or the IRS a familiar sounding amount to deal with that creditor quickly
  • The call comes at a time or day that you can’t quickly call back your attorney’s office or the IRS to verify the call, and you’re told you’re at risk of being arrested if you don’t take care of it immediately
  • The person asks for information you’ve already provided your attorney’s office in the form of your bank account, so that you don’t think much of just providing it again.

This is the kind of scam that has successfully fooled recent bankruptcy filers. In Vermont recently a 70-year old woman lost $700 and another woman lost $686.

This scam prompted the Vermont Attorney General to send out a press release titled: Attorney General Warns Of Scams Targeting Bankruptcy Filers, which included the following:

The perpetrators of this scam use software to “spoof” the Caller ID system so that the call appears to be originating from the phone line of the consumer’s bankruptcy attorney. Consumers are then instructed to immediately wire money to satisfy a debt that is supposedly outside of the bankruptcy proceeding.

The Attorney General’s Office is reminding all consumers to be wary of any calls they did not initiate that demand or solicit funds for any purpose. Currently active scams include calls from scammers posing as agents of the IRS, debt collectors for payday loans, family or friends in need of emergency assistance, and technical support for Windows computers.

Consumers should never give out personal or account information to an unverified source.

To Repeat…

We all know that last sentence is very sensible. The challenge is not being taken advantage of in this more sophisticated way by somebody sounding authoritative and reliable, just when you’re feeling vulnerable.

If you or a family member gets this kind of call, hang up and reach your bankruptcy attorney as soon as possible. Do NOT give out any personal or financial account information to the caller.

 

The New Year, a Fresh Start!

You know bankruptcy gives you an overall fresh financial start. But it can provide special fresh starts you may not know about.

 

The Overall Financial Fresh Start

You get a new financial life by legally writing off (“discharging”) debts so that you are out from under them and never have to pay them again. With consumer and small business debts you have two main choices about how this happens.

The Chapter 7 Fresh Start

With a Chapter 7 “straight bankruptcy” the discharge of debts happens very fast. The moment your case is filed the creditors can’t take any more action to collect their debts against you, your money, or your property. Then usually about 100 days later the bankruptcy court enters an order discharging your debts. You are debt-free, other than possibly debts you want to keep such as a vehicle loan, and certain debts you can’t discharge like recent income taxes or back child support.

So, if you filed a Chapter 7 case in early January, right away your creditors could no longer chase you, and your debts would effectively be gone by early spring. That would be the best spring of a long time.

The Chapter 13 Fresh Start

With a Chapter 13 “adjustment of debts” the discharge of debts happens much later, although you get numerous benefits in the meantime that Chapter 7 doesn’t provide. (More about those below.)  The same as with Chapter 7, the moment your case is filed the creditors can’t take any more action to collect their debts. But under Chapter 13 that protection lasts not just a few months but for years. This enables you to deal in creative ways with special debts like home mortgages and car loans, income taxes and child support arrearages, among others. A similar protection from collection action also extends to any co-signers you may have.

At the completion of the Chapter 13 payment plan of usually 3 to 5 years, whatever debts that have not been paid are discharged (with limited exceptions like a home mortgage you want to still owe). So under Chapter 13 you get immediate relief and a partial fresh start in the form of a payment plan based on your budget, and when that plan has run its course it’s followed by a full fresh start with (virtually) no remaining debts.

So, if you filed a Chapter 13 case in early January, right away your creditors could not chase you or any co-signers, you’d enter into a reasonable payment plan to deal with your special debts in ways better than Chapter 7 can, and when that plan is paid off you’d have a full fresh start.

The Special Fresh Starts

Beyond these broad ways that Chapter 7 and Chapter 13 give you a new start, they each provide special tools for giving you new starts within different specific components of your financial life. We will dig into these in the next several blog posts and introduce a few of them here:

  • A fresh start with vehicle loans through “reaffirmation” and “redemption” under Chapter 7, or through “cramdown” under Chapter 13. 
    • With a reaffirmation you agree to keep the vehicle and remain liable on the vehicle loan, legally excluding it from the blanket order discharging your other debts.
    • With redemption you keep the vehicle by paying the creditor its fair market value (not what you owe), perhaps through a new redemption loan.
    • With cramdown, you re-write the loan based on the fair market value of the vehicle, usually with lower monthly payments and interest rate, often saving thousands of dollars.
  • A fresh start with a home mortgage by catching up the arrearage through a “forbearance agreement” under Chapter 7, or through the court-approved payment plan under Chapter 13.
    • With a “forbearance agreement” the mortgage lender voluntarily agrees to not foreclose as long as you catch up the mortgage through a schedule of extra payments, usually restricted to as much arrearage as you can catch up on within a year or so.
    • With a Chapter 13 payment plan you are usually given as much as 3 to 5 years to catch up, with a lot more flexibility to pay other important creditors at the same time or even ahead of the mortgage arrearage.
  • A fresh start with personal property collateral through “reaffirmation” or simply not paying under Chapter 7, or through “cramdown” and second mortgage “stripping” under Chapter 13.
    • With personal property reaffirmation you either agree to pay the full amount of the debt or sometimes only a portion of it in return for keeping the collateral you want.
    • Under some circumstances, with relatively modest value collateral, you may not have to pay anything to keep it.
    • With Chapter 13 cramdown, you pay over time for the right to keep the collateral, based on the fair market value of the collateral.
    • With a second (or third) mortgage strip, you can stop paying the monthly second (or third) mortgage monthly payment and discharge much (or even all) of the balance owed on the mortgage, making paying for the first mortgage that much more feasible.
  • A fresh start for your home’s title, by “voiding” judgment liens under either Chapter 7 or 13, and by catching up on unpaid property taxes, clearing income tax and homeowner association liens from the title under Chapter 13.
  • A fresh start with any child and spousal support arrearage by stopping your ex-spouse’s or the support enforcement authority’s aggressive collection efforts and paying off the arrearage based on your budget’s capacity to do so over time, only under Chapter 13.
  • A fresh start with unpaid income taxes by discharging older taxes through Chapter 7 or by a combination of discharging the older taxes and paying off the newer taxes through Chapter 13.
  • A fresh start keeping everything you own free and clear, either by exempting everything through Chapter 7 or by protecting anything that isn’t exempt through Chapter 13.

 

Your Most Important New Year’s Resolution

As frustrating as it may be sometimes, so much of the rest of our lives turn on our financial well-being.

Our emotional state is tied closely to the amount of stress we deal with daily, and financial problems often give us near-constant stress.

Our health is often affected. First, it’s directly affected by the stress, likely more than we realize. Second, common sense—backed up by research—says that the inability to pay for preventative and other healthcare, including appropriate dental care, degrades people’s health, and indeed shortens life expectancies. And third, working extra jobs and worrying about finances cuts into sleep, and makes it difficult to eat healthy and get good exercise.

Our relationships are almost always detrimentally affected by our finances. It’s one of the very top reasons for divorces. It affects our ability to meet our responsibilities to our children. It’s hard to maintain friendships much less be a fully engaged member of society when you are struggling to take care of yourself financially.

Our self-esteem is inevitably adversely affected. Even if we have a perfectly healthy perspective on money, it is very difficult to escape feeling like a failure when constantly reminded that you aren’t able to provide what you and your family need.

So make and keep the most important New Year’s resolution of all: see a bankruptcy lawyer during the first few days of 2016. Start the ball rolling towards getting the fresh start that you truly need.  

 

Bankruptcy Timing and the Holidays: Personal Injury Damages from Driving Under the Influence

Even bankruptcy cannot help if you drink and drive, cause an accident, and hurt somebody, damage property, or are fined.

 

There are 3 different kinds of liabilities that can come from driving while intoxicated and getting into an accident: 1) personal injuries to others, 2) property damage, and 3) criminal traffic citation. Today we focus on the first of these.

Personal Injury or Death from Driving while Intoxicated

If you are in a traffic accident and you are injured and there’s not enough insurance to pay for your medical bills, usually you can file a bankruptcy and “discharge”—legally write off—those medical bills. If someone else is injured, you are found to be at least partially at fault, and your insurance doesn’t cover the other person’s medical bills, loss of employment income and any other such damages, you can usually discharge those liabilities by filing bankruptcy.

But not if you drink and drive and hurt somebody. You will not get financial relief from the bankruptcy laws.

The Bankruptcy Code has a list of the types of debts and liabilities excluded from discharge. It includes any debt:

for death or personal injury caused by the debtor’s operation of a motor vehicle, vessel, or aircraft if such operation was unlawful because the debtor was intoxicated from using alcohol, a drug, or another substance.

See Section 523(a)(9) of the Bankruptcy Code.

So if you operate a vehicle with a blood alcohol level above the legal limit and have an accident causing someone personal injury or death, bankruptcy will not “discharge” your liabilities from that injury or death. Such liabilities could total hundreds of thousands or even several million dollars in the case of a death.

Besides the grave harm caused to the other person, this is a potentially financial life-ruining event for you. You’d be weighed down by a huge debt that you could never get away from, even by using the usual tool of last resort for dealing with serious financial debts, the bankruptcy laws. 

Chapter 7 and Chapter 13

There are a few kinds of liabilities that can’t be discharged through a Chapter 7 “straight bankruptcy” but can be discharged in a Chapter 13 “adjustment of debts after paying all that you can afford to pay of your debts for 3 to 5 years.

But not DUI/DWI debts. The law is clear that this exception to discharge applies to cases filed under Chapter 13 just as it does to those under Chapter 7. (See Section 1328(a)(2) of the Bankruptcy Code.)

Any Chemical Impairment Applies

This exception to discharge explicitly includes being “intoxicated from using alcohol, a drug, or another substance.” As long as the driving “was unlawful” as a result of the intoxication, the resulting personal injury liability won’t be covered by bankruptcy.

Drunk Boating or Flying

This exception to discharge also explicitly applies to injuries “caused by a debtor’s operation of a motor vehicle, vessel, or aircraft.” Again all it takes for the law to make such operation illegal—and it is illegal virtually everywhere to operate a boat or plane while under the influence.

Conclusion

There are plenty of reasons not to drink and drive. Particularly during the holidays it may help to have one more reason that you may have not have known about. 

And besides possibly helping you, this information may be even more important to pass on to your friends and family, and help prevent someone from getting on the road impaired.

 

Bankruptcy Timing and the Holidays: Gift-Giving and “Fraudulent Transfers”

Gift-giving, or selling for much less than actual value, can cause problems ahead of bankruptcy, but only if it’s a large gift.

 

“Fraudulent Transfers” Usually Not an Issue

This blog post is about a topic to be aware of but one that’s seldom an issue for consumers or small business owners filing bankruptcy. However, in part because “fraudulent transfers” often involve some version of gift-giving, it’s particularly worth getting an understanding of this during the holiday season.

We’ll briefly explain here what a “fraudulent transfer” is, its two different forms, why neither are a problem for most people, and when you should be concerned.

What’s a “Fraudulent Transfer”?

Basically, it’s a debtor’s giving away (transferring) an asset to avoiding paying creditors the value of that asset.

This legal concept was first addressed more than 400 years ago in English law, which we adopted, so this is an issue that’s been around for a long time.

More precisely, under federal and state fraudulent transfer laws if you give away something (including potentially as a holiday gift), then under certain circumstances your creditors could require the person to whom you gave that gift to surrender it to the creditors.

Legal proceedings to undo fraudulent transfers can happen both in state courts and bankruptcy court. When in a bankruptcy case, a bankruptcy trustee acts on behalf of the creditors to undo the transfer.

The transfer can be an outright gift or it can be a sale in which the asset is sold for much less than its value.

Actual Fraud and Constructive Fraud

Actual fraud happens when a debtor gives a gift or makes a transfer “with actual intent to hinder, delay, or defraud” one or more creditors. (See Section 548(a)(1)(A) of the Bankruptcy Code.)

Constructive fraud happens most often in the consumer context 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.” (See Section 548(a)(1)(A) of the Bankruptcy Code.) Very importantly, with a constructive fraudulent transfer the debtor does NOT need to intend to defraud anybody, and yet the transfer can be undone if the required circumstances are present.

Why This Is Usually Not a Problem

There are practical reasons why most people don’t have to worry about having engaged in fraudulent transfers before filing bankruptcy.

First, most people simply don’t give away their possessions before filing bankruptcy. They generally need most everything they have. What they do own is usually protected in bankruptcy through property “exemptions,” so there’s usually no motivation to give away anything.

Second, the bankruptcy system doesn’t care about relatively modest gifts, and most people considering bankruptcy don’t have the means to give anything but modest gifts.

By “modest” the bankruptcy system generally means a gift or gifts given over the course of two years to any particular person with a value of more than $600. The Bankruptcy Code does not refer to that threshold amount. But the pertinent official form that you sign “under penalty of perjury” does so.

The Statement of Financial Affairs for Individuals (effective 12/1/15) 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?

And the third practical reason that there usually isn’t a fraudulent transfer problem is that, given what it costs in attorney fees and other expenses for a bankruptcy trustee to try to undo a gift or transfer, the practical threshold in most cases is likely at least as high as $600 in value of the transferred asset (and likely more) regardless how the questions in the bankruptcy documents are worded.

Accordingly, even when the same form also asks a question about transfers other than gifts which does NOT have a stated dollar threshold, in most cases a trustee would not pursue a transfer unless the anticipated money from undoing the transfer would outweigh the anticipated costs. This question without a threshold dollar amount (#18) asks:

Within 2 years before you filed for bankruptcy, did you sell, trade, or otherwise transfer any property to anyone, other than property transferred in the ordinary course of your business or financial affairs?

Every applicable transfer must be listed here, but again the trustee would generally not do anything about it unless its value made the effort worthwhile. That does depend on the circumstances. For example, if the trustee already had non-exempt assets to liquidate and distribute among the creditors, he or she may be more inclined to pursue a gift or transfer.

Conclusion for the Holidays

The point is that modest gifts and transfers are not the target of this law.  So fraudulent transfers are not an issue in most consumer and small business bankruptcy cases.

But if anything you’ve read here raises any concerns whatsoever, be sure to talk to an experienced bankruptcy attorney. Preferably do so before giving away anything of any meaningful value, or selling it for a price less than within a reasonable range of its actual value. Remember that this applies not just to situations in which you are considering selling or giving away assets purposely to prevent them from going to your creditors. It can also apply if you have no such intent.

And if you’ve already given the gift or made the transfer, all the more reason to bring this up with an attorney. There may well be ways to get around the problem even after the gift/transfer has been made.

 

Bankruptcy Timing and the Holidays: “Preference” Payments

You may have extra motivation and greater ability to repay a personally important debt this time of year. But maybe you shouldn’t.

 

Careful about Paying a Favored Creditor

Around the holidays you may be extra motivated to pay back a personal loan. The relative or friend may be in real need of the money and pressuring you to pay it. Or if you are considering bankruptcy you may not want it to involve this person, or to have him or her know about it.  

You might feel be better able to pay this debt. You may have gotten an annual bonus from work, or more income from working extra hours or a side job during the holidays. You might have even stopped paying other creditors so you have more money to pay who you want.

But when you know the possible consequences you might not want to pay that special debt after all. At least not yet.

The Rare, Dangerous, but Avoidable “Preference”

“Preferences” are among the most frustrating situations in bankruptcy. They seldom happen but are a major headache when they do. Especially because they can usually be avoided, they are worth understanding. That’s especially true during the holidays.

The Definition of a “Preference”

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 during the earlier period.

In other words if you pay one (or more) special creditor(s) 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. Instead of having a satisfied favored creditor, you could have a very unhappy one. You may even feel compelled to pay that person AGAIN to make up for the money taken away from him or her. Either way, not a good result, one you want to avoid.

The Purpose of “Preference” Law

The reason for this is to promote one of the basic principles of bankruptcy law—legally equal treatment of creditors. As a result people in financial trouble are discouraged from playing favorites among their creditors for a certain period of time before filing bankruptcy. In theory that makes the situation overall more financially fair to all the creditors.

A Holiday Scenario

“Preferences” make more sense by example. Imagine that you owe your brother $2,500 from money he lent you a couple years ago when you didn’t have the money to pay your mortgage or rent. You were supposed pay back that loan long ago but you just haven’t had the money. He now really wants the money. Because of a bunch of late year overtime and because you’ve stopped paying other creditors you’ve scraped together the money to pay off this debt. But here’s what would happen if you did so and then would file a bankruptcy case within the following year.

A month or two after filing bankruptcy the bankruptcy trustee would very likely demand that your brother pay $2,500 to the trustee. If your brother didn’t, the trustee would likely sue him to make him pay. Once he did pay, that $2,500 would be divided among your creditors according to a set of “priority” rules.

An Avoidable Problem

“Preferences” 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.

“Preferences” Used in Your Favor

That one-year look-back period only applies to “insiders,” basically anybody who you would have a personal or business reason to favor. For creditors who are not “insiders” the look-back period is only the 90 days before filing. Particularly with these creditors the “preference” law can sometimes be turned around to use to your advantage because it can force a creditor who garnished your wages or got other money from you on the brink of your bankruptcy filing to return that money. There may be ways for that money to go to a debt you need paid, or possibly even back into your pocket.

But to distinguish between creditors who are “insiders” and those which are not, and to get the best result for you in this particularly complicated area of bankruptcy law, you truly need the advice and guidance of an experienced bankruptcy attorney. Preferable get this advice before you pay your favored creditor. But even if you’ve paid him or her, your attorney will help figure out and execute the best way for you through the situation.  

 

Bankruptcy Timing and the Holidays: Extra Income in December Affecting the “Means Test”

We show step-by-step how filing bankruptcy before the end of December can enable you to qualify for Chapter 7 “straight bankruptcy.”

 

Have you received or are you expecting any extra money from any source during December? It’s probably the month when that’s most likely. If you are fortunate you may receive a bonus from your employer, or you’re working a part-time Holiday job or getting bigger paychecks because of overtime. Or you may get a cash gift from a parent or some other relative, either for yourself or to help buy gifts for your kids.

In our last blog post a couple days ago we explained the reasons why filing bankruptcy DURING the calendar month that you receive some usual income can help you qualify for Chapter 7, and avoid being forced into a Chapter 13 case. Today we give you an example to help make sense of this.

Quick Summary of the Income Timing Laws in the “Means Test”

Practically speaking the means test determines whether you qualify for a Chapter 7 “straight bankruptcy” which usually takes less than 4 month, or instead must do a 3-to-5-year Chapter 13 “adjustment of debts.” The easiest way to pass the means test is for your “income” to be no more than the appropriate “median income” for your state and family size.

But “income” for the means test is different than you’d expect: it includes 1) almost all sources of money, but 2) only the amounts received precisely during the last 6 FULL calendar months. The 6-month amount is multiplied by 2 for the annual “income” total. 

An important consequence of this odd definition of “income” is that if you receive a bonus or any other unusual income or money during December, that will not be counted for the means test as long as your Chapter 7 case is filed by December 31. Doing so makes it more likely that your income will be less than your applicable “median income,” and therefore you’d qualify for a Chapter 7 bankruptcy.

Now let’s put these principles into practice.

Our Example

Let’s assume that the median income amount for your family size in your state is $56,000. So if your means test “income” is no more than that you effectively qualify for Chapter 7.

(You can find the median income that actually applies to you on this chart of the U.S. Trustee Program. As of this writing this chart is current for bankruptcies filed on or after November 1, 2015. It’s updated about every half-year.)

Let’s also say that you get paid on the 1stand the 15th of each month, receiving a gross salary of $2,200 per payday, or $52,800 per year. You started working for your employer in 2013, and until this month have received no income or funds from any sources whatsoever other than your employer since then. But you received an annual bonus of $1,200 from your employer on December 3, and your parents gave you a holiday gift of $900 in cash on December 7.

In this situation if you filed a Chapter 7 bankruptcy case in December before the end of the month, your income for means test purposes would be below the $56,000 median income amount. So you’d immediately pass the means test. That’s because your “income” during the 6 full calendar months of June through November would be $52,800, consisting of 2 paychecks of $2,200 gross income per month, or $4,400 per month times 6 months, or $26,400, times 2 for the annual amount of $52,800.               

But if instead you filed anytime in January of next year, your income would be above that $56,000 median income amount. So at least as far as your income goes you would not pass the means test. That’s because your “income” during the 6 full calendar months of July through December would be $56,600, consisting of 2 paychecks of $2,200 gross income, or $4,400 per month times 6 months, or $26,400, plus the $1,200 bonus and $900 gift, or a total of $28,500, times 2 for the annual amount of $57,000.               

(Notice that this is true even though your income for the 2015 calendar year would be less than the $56,000 median income amount. The extra income in December of the $1,200 bonus plus $900 gift, plus the regular paycheck gross income of $52,800, would total only $53,900. But these extra bonus and gift amounts in December are in effect doubled when coming up with the annual amount if the case is filed in January, resulting in being over the median income amount.)

So, under these facts, filing on or before December 31 you would result in passing the means test, while on or after January 1 you would not pass the means test based on your income. (You may or may not eventually pass the means test based on your allowed expenses or other factors, but there’s at least a significant risk that you would not, and so could not complete a Chapter 7 case.)

The Bottom Line

A Chapter 13 filed for reasons that it was designed for is often well worthwhile. It can save a home from foreclosure, enable you reduce and pay income taxes, and do many other things. But to be forced into Chapter 13 for 3 to 5 years for no reason other than for failing the means test because of bad timing would be very unfortunate. So see an experienced bankruptcy attorney as soon as you can to determine what’s best for you, including the best timing.

 

Mistakes to Avoid–Selling Your Home out of Desperation

If you’re hurting financially and getting pressured to sell your home, first get bankruptcy advice to potentially save you lots of money. 

 

Do you have serious financial pressures inducing you to sell your home? Those pressures may be from your mortgage lender itself or other home-related debts like property taxes, a second mortgage, or some other creditor that has put a lien on the home, such as the IRS or your state income tax agency. Or you may have other debts not related to your home but which put your home in jeopardy because they suck money away from your mortgage payments.

So these pressures may be tempting you to hurriedly sell your home, or to just give it up to your mortgage lender. But if you rush to sell your home (or surrender it) you could lose out on the opportunity to keep it through the tools of bankruptcy. Some of those tools may even create equity in your home, making it economically more worthwhile to save. Or maybe you would be enabled to still sell it, but do so later (even a couple years later) at a higher price and/or when the timing is better for you.

Our next few blog posts will go through some of the major ways bankruptcy can save you money, sometimes a tremendous amount of money, on your home. The first way, for today’s blog post, involves judgment liens on the title of your home.

Being Saddled with a Judgment Lien

If you have been sued by a creditor (or, for that matter, by anybody with a claim against you), and you didn’t win the lawsuit or pay off the obligation, most likely a judgment was entered against you. In some situations, you might not even realize or remember that this had happened to you. It may have been many years ago, potentially even before you bought your home, and the judgment lien may have attached after you bought the home.

Even if you did deal with it at the time and settled the matter and are making payments under an agreement with the creditor, most likely a judgment was still entered against you in case you didn’t end up paying as agreed.

Either way, the judgment is very likely a lien against your home. That lien amount is often substantially more than the amount you thought you owed the creditor, as a result of extra costs that the creditor stacks onto the basic debt—for court filing fees, attorney fees, late charges, and continuously accruing interest.

Potential Future Judgment Liens

Even if you haven’t been sued by a creditor, if you are behind on payments, or the debt was sent to collections, a creditor or its collection agency may sue you in the near future. That creditor could get a judgment against you and place a lien on your home’s title. If you’re in the process of selling your home, this lien could hit the title before the closing of your home sale.

Paying a Judgment Lien Out of Home Sale Proceeds

In all these situations, the judgment lien generally has to be paid in full before the house can be sold. If, as usual, the judgment is paid out of the proceeds of the sale, this dollar for dollar reduces the amount you receive out of the sale. And the lien could reduce the amount of money available to go to more important debts that you intended to pay out of the sale proceeds, such as property or income taxes, or child or spousal support.

If there are not enough sale proceeds to pay the judgment, you will either have to pay the full judgment amount out of your pocket, or at least some discounted amount to get the creditor to release the lien. To the extent that you don’t pay it in full, you would likely continue owing the balance, and need to pay it at some point. Finally, if your home does not sell for enough money to pay off the judgment creditor and it won’t settle for less, the judgment lien could jeopardize your sale.

Don’t Pay a Judgment Lien, But Instead “Avoid” the Lien

In contrast, by filing either a Chapter 7 “straight bankruptcy” or Chapter 13 “adjustment of debts” you can often “avoid”—permanently get rid of—that judgment lien and “discharge”—legally write off—the debt that resulted in the judgment. That would allow you to sell the home without paying anything on that debt.

The condition you have to meet to void the entire judgment lien is that all of this lien needs to eat into the equity in your home that would otherwise be protected by the homestead exemption.

To explain by example, assume that except for the judgment against you, your home would have $25,000 of equity (say, a $250,000 home with a mortgage of $225,000). But you have a judgment against you for $10,000, resulting in a judgment lien in that amount on your home title. Assume that in your state you’re entitled to a homestead exemption of $50,000 of home value or equity. So the $10,000 judgment lien is eating into that $25,000 of equity that you would have without the judgment, all of which is protected by the homestead exemption. As a result, in bankruptcy that $10,000 judgment lien would be “avoided”—taken off the home’s title—and the underlying debt would be discharged—forever forgiven—saving you $10,000 and giving your home that much more equity.

Clearly, if you have a judgment against you and a judgment lien against your home, you should be talking to a bankruptcy attorney. And not selling the home out of desperation to pay that judgment lien and your other debts.