In A Nutshell
(1) Failing to List All Creditors
(2) Paying Off Debts – Especially To Family Members
(3) Hiding Assets
In More Detail
(1) Failing To List All Creditors
When filing a bankruptcy (either Chapter 7 or Chapter 13) it is very important to list all of your creditors to ensure they are dealt with properly. (Get your free credit report here). Leaving a creditor off of your bankruptcy could result in you remaining liable to that creditor. Sometimes individuals ask me if they can exclude creditors in order to keep certain debts active or to shield it from the bankruptcy. My answer is always a definitive “no.”
Bankruptcy is an all or nothing thing. All of your creditors and debts owed to them must be listed in your bankruptcy. You are not allowed to knowingly and purposely exclude creditors from your bankruptcy petition. A creditor must receive proper notice of your bankruptcy filing. When listed in your bankruptcy, the creditor will receive a mailing notifying them that your case has been filed. If they are not listed in your bankruptcy, then the creditor will not receive this notice possibly resulting in the creditor successfully arguing that the debt should not be discharged (wiped away).
Clients of mine sometimes ask if they can leave off debts owed to family members. Again, my answer is always “no.” When you sign a bankruptcy petition you are doing so under oath, enforceable by the penalty of perjury. You are signing your petition saying that all of your debts and creditors are included in the bankruptcy and that you have not knowingly excluded any creditor. Failure to include any debt (especially one owed to a family member), if discovered by the Court, could result in your entire bankruptcy being dismissed without receiving a discharge of all of your debts.
You cannot leave a debt off of your bankruptcy in the hopes that you can continue to incur debt with the creditor. Individuals often want to know if they can exclude a credit card with a low balance owed in order to continue to use the card during and after the bankruptcy. You know my answer: “no.” First (and in addition to the reasons listed above), you cannot incur any debt while in a bankruptcy. Even if you were allowed to exclude a credit card from your bankruptcy, you could not then use the credit card during your case. Incurring debt during a bankruptcy can result in your case being dismissed without receiving a discharge of your debts. Second, in my experience, creditors that are excluded from your bankruptcy still find out about the filing and terminate your ability to incur any future debt under the current agreement.
(2) Paying Off Debts – Especially To Family Members
In most circumstances, It is a bad idea to payoff a debt (especially one owed to a family member) prior to filing a bankruptcy. Paying off any debt on the precipice of filing bankruptcy is scrutinized by the court and could be considered a “preferential transfer.” In addition, paying off a debt could be a waste of money or could create liquidation issues. Because of the many issues associated with this portion of the Bankruptcy Code, it is important to consult an attorney. You can start that process by filling out our online intake form.
Preferential Transfer. First let me define what the Bankruptcy Code refers to as a “preferential transfer.” These are payments or transfers made to a creditor for a debt that you owe during a certain time period prior to your bankruptcy being filed. By making this transfer you allow the creditor to receive more than it otherwise would have received through your bankruptcy. Basically, the creditor you paid is given “preference” by you and reduces your assets (i.e. the money used to pay the debt) making the transfer unfair to your other creditors. The result of making a preferential transfer is the Trustee in your case can file a lawsuit against the creditor and undo the transfer/payment that was made. The asset (usually cash) that was transferred will come back into your bankruptcy estate and be used by the Trustee to pay off some of your debt. The period of time the Trustee can look back and find a transfer to be preferential depends on the type of debt and the creditor’s relationship to you.
Paying Debt To Non-Family. Paying a creditor who is not an “insider” (i.e. family member, friend, coworker, etc.) can be looked at as a preferential transfer if done within 90 days of your bankruptcy being filed. This may not be a big deal to you if you paid money to a credit card or other finance company with which you do not have much of a relationship. But, it could matter if the creditor you paid was a medical provider or other local company that you desire to continue to interact with in the future. Certainly, if the Trustee did go after one of these transfers, then it could delay the receipt of your bankruptcy discharge.
Paying Debt To Family Or Friends. Paying a creditor who is an “insider” (i.e. family member, friend, coworker, etc.) can be looked at as a preferential transfer if done within 1 year of your bankruptcy being filed. It is understandable why individuals want to pay these insiders rather than the debt become wiped away through the bankruptcy. But, it is a bad idea. The Trustee could sue your family member, friend, or coworker to receive the money that you paid for the debt. The Trustee will drag the insider into court where they could incur attorney fees, spend time out of their job and in court, and possibly have to give the Trustee the money that you paid to them which they may no longer possess.
Waste Of Money. In addition to creating issues with the transfers being preferential, paying a debt prior to filing a bankruptcy may simply be a waste of money. Certain unsecured debts (i.e. credit cards, medical bills, personal loans, etc.) will mostly likely be wiped away through your bankruptcy. Paying them before they will be wiped away is like throwing your money away. It is better to save your money, file the bankruptcy, and appropriately deal with your creditors in your case.
Liquidation Issues. You can read more about exemptions in my prior post, but for now understand that the court has created limits on the value of property you can own and file a Chapter 7 bankruptcy. If the amount of your property falls above these limits, then the bankruptcy Trustee can take your property, sell it, and use the proceeds to pay off some of your debts. The Trustee is concerned with the equity (value of property minus the debt you owe on the property) you have in your property. If you pay off or pay down the debt owed on your secured debt (i.e. house mortgage, car loan), then you may create a liquidation issue where the value of your property now falls above the exemption limits.
(3) Hiding Assets
Hiding assets from creditors and/or the Court can have major consequences in your bankruptcy. Failing to list an asset in your bankruptcy (even if unintentional) can be viewed by the Court as an unlawful attempt to shield your assets from creditors. Your bankruptcy petition must list ALL of the property you own, even if you own a minuscule percentage in the property. If you fail to disclose your ownership in property, then you risk (1) not receiving your discharge and/or (2) having criminal charges for fraud and perjury brought against you.
People have asked me, “How will the Trustee find out about my property if I do not list it?” First, due to the severe consequences of not listing property you own, it is not worth even discussing this question…just list all of your property. Second, the Trustee certainly has ways of searching and finding your property. He can do basic property searches within North Carolina (or other states if he knows you have resided there) or title searches with the DMV to see if any car, boat, or other vehicle is titled in your name. The Trustee may employ Facebook or other social media to find clues leading to property you own. I had a Trustee ask me to explain why my bankruptcy client was sitting on a motorcycle on his Facebook profile picture but no motorcycle was listed in his bankruptcy petition. In addition, the Trustee may also find out about your property from people you know. Family members, friends, coworkers, ex-spouses, creditors, and more could contact the Trustee and tell him about your assets. You may be surprised at how often this occurs in bankruptcy cases.