In A Nutshell
(1) Transfer Property/Assets
(2) Incur Debt
(3) Pay Unsecured Debt
(4) Pay Off Secured Debt
In More Detail
(1) Transfer Property/Assets
One of the most common questions I get asked during a bankruptcy consultation is “Should I transfer my ______ (name the asset) out of my name and into my relative’s name?” My response is always a definitive “No.” Transferring property prior to filing a bankruptcy can have severe consequences to your situation. It could keep you from filing bankruptcy.
Any transfer of property you have made in the prior 2 years (4 years in some instances) has to be disclosed in your bankruptcy. If the transfer of property was made in an ordinary business transaction, then there will be no problem. For example: if you sold a car 1 year ago to an individual who found your car on Craigslist, then this will not create an issue in your bankruptcy case.
On the other hand, if you transferred property with the intent to hide it from creditors, then you will have a problem in your bankruptcy. I often see this when individuals transfer a car to their relative so they will not be forced to sell it to pay off a debt. The Trustee in your bankruptcy case could force this transaction to be undone, causing the asset to come back into your name. If you are unable to exempt the value of this asset, then the Trustee (in a Chapter 7 bankruptcy) could take the asset, sell it, and payoff some of your debt. Obviously, this leaves you without the asset. A Chapter 13 Trustee will not take and sell the item, but this asset being put back in your name could cause a higher bankruptcy payment to pay off more of your unsecured debt.
If such a transfer is not properly disclosed in your bankruptcy and the transfer is later discovered by the Trustee or another party to your bankruptcy, then the failure to disclose could result in you not receiving a discharge (your debts are not wiped away) or possibly criminal charges being brought against you.
It is very important to disclose all of these transfers regardless of your intent behind the transfer to your attorney. Begin this process by filling out our online intake form for a free analysis of your situation.
(2) Incur Debt
It is a bad idea to incur debt on the eve of filing bankruptcy. Certain debts incurred just before your case being filed may not be wiped away through your bankruptcy. Meaning you will still owe the debt after the bankruptcy ends. In order for the debt to not go away the creditor has to argue that you had no intent to pay the debt back when it was incurred. In my experience it is rare for a creditor to make such an argument, but this is certainly an issue that you do not want to risk.
Another type of debt that may not be wiped away if incurred on the eve of filing bankruptcy is debt incurred for the purchase of “luxury goods or services.” The Law scrutinizes purchases you have made toward these goods and services for the 90 days prior to your bankruptcy being filed. Luxury goods and services are those items that are not reasonably necessary for the support and wellbeing of yourself or your family. A common example of a luxury good and service is using your credit card to purchase an expensive vacation on a cruise ship. Things that are not luxury goods and services are your everyday living expenses (groceries, utility bills, etc.)
If debt is incurred just before a bankruptcy being filed and the creditor does not raise the issues described above, then you still run the risk of your case being in jeopardy because of the other parties present in your case. One party to every case in North Carolina is the Bankruptcy Administrator (“BA” for short – I will describe their role in more detail in a later post). The BA may take an extra close look at your case given the recent debt and could possibly file a motion to dismiss your case or convert it to another type of bankruptcy. Obviously this could keep you from achieving the goals you desire through bankruptcy.
It is certainly very important to disclose when your debt was incurred and for what purpose it was incurred to your attorney. In reviewing your case and discussing these issues, I will assist you in when will be the proper timing to file a bankruptcy. It may be that you can file right now (read here about reasons not to delay filing bankruptcy). Or it may be that you need to stop using creditors, wait 3-6 months, and then file bankruptcy. Let’s get started here.
(3) Pay Unsecured Debt
Unsecured debt (i.e. credit cards, personal loans, medical bills, etc.) are discharged (meaning they are wiped away) in most bankruptcy cases. It would be unwise to pay any money toward these debts when they are going to go away through your bankruptcy. Paying these debts just prior to filing a bankruptcy would be akin to simply throwing the money away…it does you no good. It would be better for you to save your money, pay your living expenses, and pay for your bankruptcy case.
Further paying unsecured debt prior to filing bankruptcy can result in negative consequences for the creditor whom you paid. If you pay $600 or more to an unsecured creditor within 90 days of filing your bankruptcy, then the Trustee can sue the creditor to undo the transaction and get your money. The Trustee would then use your money to pay towards some of your other creditors. This may sound like it is of no consequence to you, but it might be if the creditor was a family member or friend.
When the creditor repaid is a family member or friend (referred to as “Insiders” by the Bankruptcy Code), the Trustee can actually undo the transaction if it occurred within 1 year of your bankruptcy filing.
It is important to disclose to your attorney all payments you made to creditors resulting from credit cards, medical bills, personal loans, or other unsecured debts in the last 90 days. In addition you should disclose payments you made in the last year on debts owed to relatives or family members. The attorney will be able to guide you through the consequences of filing a bankruptcy right now or waiting until payment on these debts is no longer within the 90 day or 1 year look back period.
(4) Pay Off Secured Debt
In most situations it is not advisable to pay off secured debt (i.e. mortgage, car payment) on the eve of filing a bankruptcy. In bankruptcy you are allowed to own a certain value of property. The Bankruptcy Code is not concerned, necessarily, with the total value of your property but rather the value of the equity you have in the property. As long as the value of your equity in property falls under the exemptible amounts established by law, then no issues are created in your case. On the other hand, if the value of your property falls above the exemptible amounts, then your options in bankruptcy may be limited. The exemptible amounts are the same in either a Chapter 7 or a Chapter 13 Bankruptcy.
Equity is simply the total value of the property minus any debt you have on the property. For example: your home is worth $100,000 and you owe $75,000 on your home’s mortgage. Your equity in your home is $25,000.
As you can see, paying off secured debt can result in you having more equity in property possibly resulting in you being unable to exempt your interest in said property.
In a Chapter 7 bankruptcy, owning property above the exemptible amounts can result in you losing the property. Or you may be forced to pay money to the Bankruptcy Trustee to keep him from taking your property.
For Example: Your home is worth $100,000 and you owe $60,000 on your home’s mortgage. In North Carolina you are able to exempt $35,000 of equity in your home. Using the full $35,000 exemption, you are left with $5,000 of unexempt equity in your home. The Trustee could take your home, sell it, give you $35,000, and payoff some of your creditors with the remaining money. To keep him from taking your home, you could pay him $5,000. Either way you are having to give the Trustee more than what you desire.
In a Chapter 13 bankruptcy, owning property above the exemptible amounts can result in you having to pay more towards your unsecured creditors than you otherwise would.
For Example: You have a car worth $20,000 and you owe $16,000 on the car. This secured debt will be paid for through your Chapter 13. The $4,000 equity will be exemptible (you can exempt $3,500 in your car through the “motor vehicle” exemption and use $500 from the “wildcard” exemption to exempt the rest).
Let’s assume you payoff the $16,000 just before filing the bankruptcy. Now you have $20,000 of equity in the vehicle. You will exempt as much as you can which will be $3,500 through the “motor vehicle” exemption and $5,000 through the “wildcard” exemption. This will leave a total of $11,500 (20,000 – 3,500 – 5,000 = 11,500) of unexempt equity in the vehicle. Your Chapter 13 bankruptcy payment will require that you pay at least $11,500 to your unsecured creditors.
As you can see, there can be consequences to your situation by paying off secured debt prior to filing a bankruptcy. Sometimes paying off secured debt is a good thing and sometimes it can be harmful to your situation. Talk to me prior to paying off a secured debt if you are considering a bankruptcy.