Remember the kid’s geography game, Where in the World is Carmen Sandiego?

Clues took players all around the world to stop a gang of thieves.

When it’s debt you want to stop, if you’ve moved around in the past two or three years, the rules of the game are not child’s play.

Two issues are in play.  One concerns which courthouse your bankruptcy case is filed in.  The second is what state’s  exemptions can you use.

Where you file bankruptcy

The basic rule is that you file your case in the federal district where you have lived for the past 180 days or where you have assets.  The legal term for the correct court is “venue”.

If you’ve lived in several federal districts in that period, you file where you have lived for the greater part of the last 180 days.

So, if you’ve recently moved, you can file in the district where your new home is located after you’ve been there 91 days.  Before that point, you can file in the district you moved from.

What you keep through bankruptcy

State law where your case is filed usually defines the extent of your property interests.

State law tells the bankruptcy court what you own, and federal bankruptcy law determines what happens to that property.

Even though bankruptcy is federal law, state law controls exemptions, the law that determines what you keep when you file bankruptcy.

Because state exemption laws range from scrooge-like to Daddy-Warbucks generous, debtors in the past sometime moved to a state with generous exemption laws before filing.

The bankruptcy amendments of 2005 tried to stop people from moving to get better exemptions.  The “reform” law made a state’s exemption laws  available only to people who had lived in that state for at least two years before filing.

If you haven’t lived in the state for two years, you get the exemptions of the state where you lived for the six months beyond the 24 month requirement.

And, it gets worse:  you can only use those exemptions if the law of the state allows the use of state exemptions to non residents.  [Thanks, Congress].

If state law doesn’t authorize use by non residents, you get to use the federal bankruptcy exemptions.

Morale of this story:  if you’ve lived a mobile life in the years before filing bankruptcy, make sure your attorney knows your residential history before you file the case.

More from the Soapbox on bankruptcy procedure

File bankruptcy without your spouse

Bankruptcy as a moment in your financial timeline

Does what you own drive what kind of bankruptcy you file?

 

Image courtesy of Cara Brugman. 

I keep encountering posts on internet bankruptcy boards from individuals who have “filled out the means test” and then proceed to announce their conclusions.

Given the uncertainties in the legal community about how to apply the means best and the think and re-think I engage in preparing Form B 122, I can’t imagine a non lawyer learning anything reliable from trying to do this themselves.

The tricky issues include how to deal with income from non filing spouses; from roommates or extended family member; and how to handle business expenses for the self employed. (One bankruptcy appellate panel recently decided that the judges who drew up the form did it wrong!)

You have to parse out income “received” but not “derived” during the look-back period and figure out how to report children where custody is shared.

Then there is the dispute on the deduction side about ownership allowances for paid for cars; operating allowances for older cars; debts associated with property you’re surrendering, and just what part of your telecommunication expenses go on the form.

I cringe when I ask a client to sign this form, as they cannot possibly validate all of the entries on the form.

While I won’t say “don’t try this at home”, I am certain you should draw no conclusions about the means test and your eligibility for Chapter 7 based on your efforts to take the test.

Get an experienced bankruptcy lawyer involved.

Read more

Means Test Misunderstood

Means Test Is Paper Tiger Here

Means Test In Chapter 13

Image courtesy of Pixabay.

Exemptions in bankruptcy are all about what you keep.

Exemptions define the collection of assets and rights that are safe from the reach of a bankruptcy trustee or your creditors.

But planning exemptions in a bankruptcy case is more than just the looking down the list of things you keep through bankruptcy and the dollar amount that is protected.

Jay Fleichman suggested that if the value of your assets exceeded the exemptions available, Chapter 13 needed to be your chapter of choice.

Actually, your exemptions in bankrupty swell beyond the stated amount for reasons not printed in the law books.

Subtract transaction costs to asset value

The unwritten enhancement to exemptions are the transaction costs, those expenses incurred to turn an asset into cash.

A Chapter 7 trustee can sell assets that are not exempt or that have an exemption that covers only some part of its value only if the sale produces money he can distribute to creditors.

To turn some assets into cash, he has to sell them.

There may be an auctioneer or realtor’s commission involved. The sale may trigger taxes.

And the trustee gets paid for his work from a fraction of the money he distributes to creditors.  Gotta subtract his commission before paying creditors.

So, add to the exemption value the estimated costs of the trustee’s sale and his commission.  Trustees are only supposed to take the debtor’s things for sale if the sale produces a meaningful distributions to creditors.

Why debtors keep their homes

The simplest example of transaction costs at work is a house with more equity than the exemption.

After you’ve taken the sale value of the home and subtracted the liens on the property and the homeowner’s exemption, subtract the realtor’s commission and any other sales expenses to see if there is really equity for creditors available upon a sale.

Take out the trustee’s commission and any capital gains taxes too.

In order to sell an asset, the trustee must show the court that after all the expenses, there will be a meaningful distribution to creditors.  If there’s little or nothing left after this calculation, the trustee should not sell the home.

Rearrange your holdings

If you have an asset that can’t be exempted, consider selling it and putting the sale proceeds into an asset that can be exempted.

Sure, you lose the particular asset, but you don’t lose its value, if you can put the money into an exempt form.

There are some limits:  you need to get fair market value for the asset you’re selling.  No bargain sales to your brother.  Arms length transaction for whatever the asset is worth today.

It’s no problem if the asset isn’t worth what it once was, or that the market is depressed.

You just need to realize what the world is paying today for things like it.

Make good use of cash

My favorite use of “extra” cash is to fund an IRA for every bankruptcy filer with available, non exempt money.  It is universally regarded as a meritorious move.

IRA’s, after all, now have a federal bankruptcy exemption in excess of  $1 million.

Another exemption-expanding stategy is to spend non exempt income and save exempt income.  Social Security income is exempt from creditors and from bankruptcy trustees.

If that’s your situation, consider spending the proceeds from the sale of something that isn’t exempt, and saving the exempt money.

It’s critical that you segregate the exempt income in its own bank account.  You want to be able to trace the money on deposit to an exempt source.

More ideas on what to do with non exempt cash.

Get good legal advice

Exemption planning is a tricky subject.  Some trustees and some regions of the country take huge offense if a debtor has rearranged things to keep more than he might otherwise have kept.

The larger the sums of money in motion, the more likely you are to hear the dreaded phrase:  pigs get fat and hogs get slaughtered.

An experienced bankruptcy attorney can help you find the line between the two.

Read more

Tax refunds and bankruptcy planning

What happens to my house after bankruptcy

Image:  © BlueOrange Studio – Fotolia.com

Going to court for your first meeting of creditors?

What are they going to ask me?, you wonder.

My bankruptcy clients imagine a quiz on the contents of their bankruptcy papers.

Or worse, an inquisition on why they needed to file bankruptcy.

That’s not likely.  The first meeting of creditors is much more likely to be a snooze.

Jay Fleischman set out a very comprehensive list of questions a Chapter 7 trustee might ask at your bankruptcy hearing.

Let me add my rules for answering those questions.

1.  Listen to the question

Just because you’ve read Jay’s list and think you know what’s coming, listen to the trustee’s question, all the way to the end.

First of all, it’s only polite.  Second, you want to make sure that you know what the trustee wants to know.

Your answer is being recorded.  You want to make sure you are answering the question that the trustee asked.

2.  Answer truthfully

Honest disclosure is the price of getting a bankruptcy discharge.  This is not the time to be cute or tell anything less than the truth.

You are answering under oath.  You are subject to the penalties of perjury if you are intentionally are less than honest.

3.  Be brief

Answer the question that the trustee has asked, truthfully, in as few words as possible.

Don’t explain, don’t justify, don’t ramble.

Just answer the question.

If the trustee needs to know more, he can ask a follow up question.

Usually, the trustee is just trying to make a record that he has done his job.

He has a list of cases he has complete.  Don’t make his day any longer by volunteering more than he wants to know.

4.  Don’t guess

If you don’t know the answer to a question, say so.  If the answer is honest, it’s perfectly OK.

Perhaps your counsel can help.  Maybe there are documents that provide the information.

Don’t pretend to a level of certainty if you don’t really know.

All’s well

If you’ve been diligent about getting your attorney all the requested information, chances are the first meeting of creditors will be the last, and you’ll be on your way to a fresh start.

Image:  © Innovated Captures – Fotolia.com

Trying to spend down cash before filing bankruptcy?

It’s time to talk about the float.

Not the root beer float, though that would be more fun.

The bank “float”:  the period between writing a check and it clearing your bank.

(We’ll talk about what to spend on before filing bankruptcy, too).

When you file bankruptcy, your schedules are supposed to show what you own on that day.  For checking accounts, that’s the balance that the bank shows.

If you’ve written a bunch of checks right before filing, checks still floating out there on their way to the bank make your bank balance higher than the balance in your checkbook.

Why does the float matter

The money in your bank account on the day you file belongs to your bankruptcy estate. Now, it may be fully exempt or it may be too little to interest a trustee in administering it, but that’s another story.

In the eyes of the law, it’s yours, even though you’ve written directions to the bank to pay some of it out to the holders of your checks.  Those directions (your checks) just haven’t arrived at the bank.

A bankruptcy trustee can demand that you pay over to the estate that balance, even though the money has long since been paid out by the bank, who knew nothing of the bankruptcy case when it honored your check.

Bummer.

Spending before filing

If you are in the lucky position of having more cash on hand than you can exempt in your bankruptcy case, you may want to spend that money on things you’ll need after bankruptcy.

My list of purchases/expenditures that generally pass muster with bankruptcy trustees include

• Stocking your kitchen
• Repairing your car
• Paying insurance premiums
• Refilling prescriptions
• Getting needed health or dental care
• Replacing aged appliances

But if you pay for them with a check, right on the eve of bankruptcy, you run the risk that the checks haven’t cleared the bank when your case is filed.

? More on cleaning up your finances before bankruptcy

Eliminate the float

Instead of paying by personal check, you can pay cash for your purchases.  Be sure to keep a record of what you bought so you can trace the money for the trustee.

Or, you can buy cashier’s checks from the bank, and make your purchases with certified funds.  The funds to buy a cashier’s check come immediately from your account at the bank.  A cashier’s check is a check on the bank’s checking account, not yours.

By using cashier’s checks, you spend down your funds and eliminate the risk that your bank balance will be artificially high on the day you file your bankruptcy case.  And that’s good.

More on planning for bankruptcy

What about the tax refund?

Do you know about the secret bankruptcy exemptions?

What belongs in your bankruptcy schedules

Interviewing a bankruptcy lawyer

Image courtesy of Flickr & boo_licious.

If an asset isn’t titled to you,  it does not have to be disclosed in a bankruptcy filing.

I hear it and see it in action again and again.

If it isn’t titled to you, it will be “safe” from the bankruptcy trustee and from creditors.

And yet it is wrong.

Wrong, wrong, wrong.

Still, people transfer titles to cars and cash and quitclaim their homes to friends before bankruptcy, thinking that’s smart.

No.  It’s both dumb and dangerous.

Not only does putting your assets in the names of friends and family expose them to a lawsuit to recover the property, in extreme situations it puts your bankruptcy discharge at risk.

Actions taken to “hinder, delay or defraud” creditors are grounds for denial of discharge under 11 U.S.C. 727.

What could delay your creditors more than shedding assets without getting anything in return?

Transferring asset unlawful since Elizabeth I

For well more than four hundred years, the law has contained prohibitions on fraudulent transfers.

A transfer of an asset by one who has debts constitutes a fraud on creditors if

1) the transfer is for less that fair consideration; or

2) was made for the purpose of putting the asset beyond the reach of creditors; or

3) leaves the person transferring the asset with less capital than reasonably necessary to conduct their business.

So, a transfer is actionable if it’s a gift; you intended to hide the asset; or the transfer left you broke.

Consequences of fraudulent transfer

The usual remedy against the person who gets the asset is  an order requiring the return of the asset or a money judgment in the amount of its value.

The bankruptcy code has a statute empowering the recapture of transfers made within two years of filing.

In addition, the bankruptcy trustee has the rights of the debtor’s creditors under state law to recovery any property that the debtor wrongfully transferred.  In California, creditors have four years to recover fraudulent transfers.

Putting your assets in someone else’s name

So, a really quick and effective way to screw up your bankruptcy is to put your assets in the name of your mother, your kids, or your buddy, and conceal the fact from your attorney.

Sign the statement of affairs under penalty of perjury, hiding the transfer, and you are a long way toward making a real muck of things.

Yet people again and again ask “what if I put it in someone else’s name?”.

As long as they ask me, I get a chance to say “Don’t do it”.

And they have a chance to get a discharge.

More

What your bankruptcy lawyer can’t tell you

Bankruptcy’s 90 day rule

Do it yourself bankruptcy

 

Queen E. The First courtesy of Wellcome and Wikimedia.

The divorce was over.

The assets were divided by a final judgment.

The house would go to Him, and he would pay Her $75,000 on stated terms.

It was the end of a miserable stretch in their lives.

Only it wasn’t.

Before anyone recorded the judgment of dissolution (that’s Californian for “divorce”), She filed bankruptcy.

And He found out about Bankruptcy Code  §544.

Powers of a bankruptcy trustee

When a bankruptcy is filed, all of the debtor’s assets become part of the bankruptcy estate.

OK, in our situation, She no longer owned an interest in the house:  it was awarded to Him.  When She filed bankruptcy, the house wasn’t hers.

But the bankruptcy code gives the Chapter 7 trustee powers to avoid certain transfers of property and to bring assets back into the estate that weren’t there when the case was filed.

The news coverage of the Madoff case  calls this “clawing back” assets.

One of those powers is the status of a bona fide purchaser of real estate for value without notice, a BFP, in legal parlance.

Public record incomplete

Because the deed to the family home still showed on the public record as being owned by  “He and She, husband and wife”, her bankruptcy trustee could argue that an innocent purchaser, who didn’t know about the divorce, could buy from Her something she really no longer owned.

That BFP had no notice that the house was awarded to  Him.

So, because no one had yet updated the public record, He had to fight for the house all over again.

Because this happened in California, the trustee had two arguments to make. One was the claim that that the house remained community property, and therefore all of the equity in the house was property of the estate.  Yikes!

Second, the trustee could, and did, argue that as a BFP, he could sell Her half of the house for the benefit of her creditors.  And scarier still, the bankruptcy code allows the trustee to sell jointly owned property against the will of the co owner.

Bankruptcy take-away

Divorcing parties and their attorneys can draw a couple of lessons from this tale.

1. Divide property promptly.   As long as property is community property, it is exposed to being sucked into the bankruptcy estate should either spouse or former spouse file bankruptcy.
2. Appearances count  Bankruptcy trustees are entitled to rely on record title in making the BFP argument.  Get property division decisions into the public record.
3. Co owners exposed  Anytime two parties are joint owners, the bankruptcy of one party can force a sale of the property, convenient or not.
4. Marital settlement agreements enhance estate  Assets acquired through a marital property settlement within 6 months of a bankruptcy filing go to creditors.  MSA’s are an exception to the bankruptcy estate as a snapshot of the day of filing.

In this case, the ultimate strength of the trustee’s arguments were never tested.

The amount of debt in the bankruptcy case coincided neatly with the amount He was to pay Her, and fortuitously, a refinance bought the trustee out without triggering a sale.

It’s not always so neat.

 

Image:  Fengyuan Chang

You’re looking at bankruptcy official form B9.

It arrived in your mail because someone has filed bankruptcy and listed you  as a creditor on the schedules of a newly filed bankruptcy case.

Most likely, the debtor owes you money or you have an open claim of some sort against the bankrupt.

Your rights against the debtor have just changed.

Bankruptcy law, federal law, is now prepared to upend the debtor/creditor relationship.

You need to find all the information crammed into this single page so you can determine what, if anything, to do next. (Double click the image and you’ll get an enlarged version; hit the back arrow to come back here.) [Read more…]