Category Archives: preferential transfers

“If Only I’d Gone to See My Bankruptcy Attorney Sooner . . . “

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Those are the words I hate to hear from a new client.

Bankruptcy attorneys are in the business because we want to help people. It’s an emotionally tough area of law, dealing all the time with clients who are financially hurting. Usually my clients are also hurting in other ways that are related to the cause of their financial problems—illness, injury, divorce, a decline in business, or a job loss. What makes my day is to give great news to a client, that they will now get relief from their debts, or that there is a feasible plan to save their home, or to deal with their child support arrearage or their income tax debt.

The information I share with clients is what they are unaware of before they contact me and it is what they need to know. There may be tough choices to make. I am here to arm you with the law and to guide you through the process.

But the most frustrating situations for both me and my clients are when we find out that they have self-inflicted wounds. These wounds are the easily-preventable-but-now-it’s-too-late bad decisions they’ve made, often just a few months or weeks earlier, without getting legal advice beforehand.

Here’s are some of the most common issues:

1) Preferences:  If you pay a creditor any significant amount before filing a bankruptcy—especially a relative you hope not to involve in that bankruptcy—the bankruptcy trustee may well be able to force that relative, through a lawsuit if necessary, to pay to the trustee whatever amount you paid to that relative.  The trustee can then turn around and pay that money to your creditors.

2) Squandering exempt assets:  Many clients tell me that they have borrowed against or cashed in retirement funds in a desperate effort to pay their debts, using precious assets that would have been completely protected in the bankruptcy case they later file.  Unfortunately, these clients use their retirement money to pay debts that would have been discharged in their bankruptcy.

3) Rushing to sell a home:  Bankruptcy provides some extraordinary tools for dealing with debts that have attached as liens against your home, such as judgments and 2nd mortgages. If you hurriedly sell your home to avoid involving it in your bankruptcy case, or for some other reason, you could lose out on opportunities to save tens of thousands of dollars.

As you look at this list, notice that the legally and financially wrong choice is often what seems to be 1) the morally right one, and 2) the common-sense one. Doing what seems right and sensible can really backfire. But nothing takes the place of legal advice about your own unique situation from an experienced attorney. Avoid ever having to say “if only I had gone in sooner.”

Jennifer N. Weil, Esq. offers free bankruptcy consultations by telephone – please call (201) 676-0722.

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Why Not Repay Relatives Before Filing Bankruptcy?

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Why not repay relatives before filing bankruptcy?

Why not repay relatives before filing bankruptcy? This post addresses a situation where you borrowed money from a relative before bankruptcy. Many people do this in an attempt to keep from having to file for bankruptcy. But often, the money borrowed from the relative isn’t enough to prevent the inevitable.

The general rule about repaying creditors before bankruptcy can be stated as follows: If, before you file a bankruptcy, you pay a creditor more than you are paying at that time to your other creditors, then that favored creditor may have to return the money so that it is shared among all your creditors.

This is especially true if you are paying one creditor when you are no longer paying anything to anyone else. The payment to your favored creditor is called a “preferential payment”—you are considered to be paying that creditor in “preference” over your other creditors.

Unfortunately, the good intentions you had in repaying a creditor may backfire, especially if that creditor – the person to whom you owed the money – is a family member. That’s because repaying a relative within the year before filing for bankruptcy can get that family member mixed up in your bankruptcy case. Your relative may have to fork over the money to your bankruptcy trustee—even if that money has already been spent.

The trustee may well sue your family member to get that money, which is something that bankruptcy law allows the trustee to do. And afterwards, assuming that you feel a moral or family obligation to make that person whole, you would be paying that debt a second time after your bankruptcy is done.

The good news is that this problem can be avoided if you get good legal advice before you make the “preferential” payment or series of payments to that favored creditor. Even if you’ve already made that payment or series of payments when you see your attorney for the first time, there are often ways to get around it.

Watch out – the law about preferences is complicated. Section 547 of the Bankruptcy Code, while by no means the most confusing one in the code, is still unclear. It’s about 1,318 words long, containing 56 sub-sections and sub-sub-sections. If you look at it, I think you’ll agree that this is NOT a do-it-yourself aspect of bankruptcy law.

So IF there is a chance that you will need to file a bankruptcy, BEFORE you pay anything to a relative or any other kind of special creditor that you feel duty-bound to pay, FIRST talk to an experienced bankruptcy attorney. Do so even if—in fact especially if–you don’t consider the person you’d like to pay a “real” creditor, because, for example, the debt was never put in writing, or nobody knows about it.

And most importantly, if you HAVE made such a payment before you see your attorney, be sure that you disclose this information to the attorney at the beginning of your first discussion. It may well affect the timing of your bankruptcy filing. Preferences are mostly a problem when they are discovered AFTER the bankruptcy is filed. That’s what you want to avoid most. Avoid that and it’s possible that preferences will not be a problem for you.

If you’re thinking about filing for bankruptcy in New Jersey, call Jennifer N. Weil, Esq. at (201) 676-0722.

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How to recognize an abusive bankruptcy filing

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What is an abusive bankruptcy filing? When does a bankruptcy court consider a debtor’s Chapter 7 filing to be an abuse of the bankruptcy process?

A bankruptcy court will look at whether the person filing the bankruptcy acted in bad faith and at the entire circumstances surrounding the debtor’s financial situation.

A Florida court addressed this issue in a recent case. Not only were the debtors living what the court considered to be “an extravagant lifestyle” both before and after their filing, but they also failed to disclose all relevant information in their bankruptcy filing.

Among other factors, the court found the following to be especially significant – the debtors:
1) Initiated a lease on a luxury car – an Infiniti – the month before filing for bankruptcy;
2) Timed the filing to be right before a significant raise in income;
3) Had excessive withholding of their Federal taxes and increased 401(k) contributions;
4) Transferred property and/or money right before and after filing for bankruptcy;
5) Tried to hide cash from the bankruptcy court; and
6) Spent a lot of money on day trading, brokerage fees, restaurants, and non-essential purchases.

The court also examined whether the debtors were able to pay their unsecured debts. With disposable income of over $3000 per month left over after monthly expenses, the court found that yes, these debtors would be able to pay back about 54% of their unsecured debts over about 60 months.

Primarily because the debtors could repay a significant portion of their unsecured debt, the court found that it would be an abuse of Chapter 7 to give them relief under that chapter. But the court took other factors into account, such as:
1) One of the debtors was experienced in financial matters and they both had experience with Chapter 7;
2) The debtors timed their filing to take place just before a raise in income;
3) They transferred money and/or property before and after their bankruptcy filing;
4) They made no effort to reduce expenses and live “a luxurious lifestyle”;
5) They decided to keep and pay on 3 luxury vehicles that had no equity;
6) They make large mortgage payments on a house that has no equity;
7) The debtors increased their monthly vehicle obligations right before filing;
8) The debtors provide a rent-free home to two relatives, whose utilities they also pay; and
9) Their bankruptcy filing was not the result of an unexpected or catastrophic event.

The debtors’ Chapter 7 case was dismissed and they were given time to convert their case to an appropriate chapter of the Bankruptcy Code.

The factors listed above, taken together, are enough to probably make any bankruptcy court sit up and take notice – in a bad way. The existence of just one of these factors might not be enough to lead to dismissal of a Chapter 7 case, but it really depends on the individual facts of each case.

This post is based on In re Ricci, Case No. 6:09-bk-00914-ABB, (Bankr., Middle Dist. Fla., Orlando Div. 2009).

If you are looking for a New Jersey bankruptcy lawyer, please call (201) 676-0722.

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Would you like to repay Aunt Sally before filing bankruptcy? Read this first.

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The whole issue of whether you should repay someone to whom you owe money before you actually file for Chapter 7 bankruptcy is more complex than it looks at first glance. I introduced the issue in a previous post about repaying debts before bankruptcy, but there is a lot of detail here that is worth examining.

You may recall from my previous post that if you repay someone you owe money (whether it’s American Express or your Aunt Sally) just before filing for bankruptcy, and the total repayment is $600 or more, the bankruptcy trustee could take back that money from your creditor.

The trustee will look back only 90 days before your filing to see if you repaid any ordinary creditors, such as American Express. But for creditors like your Aunt Sally, the trustee will look back a year before your filing for repayments that they can take back. If the trustee finds loan repayments and takes them back, they can be used to repay your other creditors. The money doesn’t go back to you.

A loan repayment made before bankruptcy that the trustee can take back is known as a “preference” or a “preferential transfer.”

But even when the trustee decides that a payment made to a creditor before a bankruptcy filing was a preference that they can take back, there are defenses that might be applicable. Two of these defenses are: 1) The earmarking defense and 2) The new value defense.

The earmarking defense is available when someone provides you with money to re-pay one of your existing creditors.

In a recent decision the Third Circuit Court of Appeals found that certain things need to be present for the earmarking defense to work: 1) An agreement between you (the debtor) and the person providing you with the money stating that the new money will be used to pay the prior debt; 2) Performance of the terms of the agreement; and 3) This transaction does not reduce the value of the debtor’s estate.

The idea behind the earmarking defense is that the debtor never had an interest (in the sense of a property interest) in the funds to begin with.

The second defense is the “new value” defense. In the same decision mentioned earlier, the Third Circuit said that for the new value defense to apply, you need: 1) A preferential transfer; 2) After receiving the preferential transfer, the creditor makes a new loan to the debtor – this new loan must be unsecured; and 3) As of the bankruptcy filing date, the debtor has not yet repaid the new loan to the creditor.

An example of when the new value defense is available would be when you repay your Aunt Sally the $2500 she loaned you and then your Aunt Sally makes a brand new $2500 loan to you that you had not yet repaid by the time you filed for bankruptcy. It’s basically like reversing the loan repayment.

The Third Circuit decision I referred to above is Shubert v. Lucent Techs. Inc. (In re Winstar Communs., Inc.), 554 F.3d 382 (3d Cir. 2009).

If all this is confusing to you and you don’t know what to do, remember this: Seek advice from a bankruptcy attorney before repaying any loans to anyone in any amount, whether it’s American Express or your Aunt Sally or anyone in between! If you’d like, give me a call at 201-676-0722.

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Repaying a debt before bankruptcy? Better think twice

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Day 4 - Paying off debt
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Can you repay a debt to a friend or a creditor before you file for bankruptcy? Yes, you can, but it’s not necessarily a good idea because that repayment may be what bankruptcy law calls a “preference” or a “preferential transfer.”

After you file for bankruptcy, preferential transfers may be taken back by the trustee. Determining whether or not a transfer constitutes a preference is very fact-specific, but bankruptcy law defines a preference as a payment (not necessarily of money) made to or for the benefit of a creditor for a debt previously owed while the debtor was insolvent. To be a preferential transfer, the transfer must be made within the 90 days before filing. Except that if the transfer was made to an “insider” (such as a relative), the trustee can look at transfers made within the year before the bankruptcy filing.

But when you buy something at the grocery store, for example, that’s not a preference because it is a contemporaneous exchange for value. You are immediately getting something in return for your payment.

Section 547 of the bankruptcy code, which governs preferential transfers, contains many other exceptions to the definition of preferential transfers and as mentioned above, the analysis of whether a transfer is a preference is fact specific. If you are thinking of repaying anyone to whom you owe money before filing for bankruptcy, stop and consult an attorney first. My email address is: jweil@jenlawyer.com.

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