What to Avoid When You Are Filing for Bankruptcy
Interviewer: Sometimes you have to fix bankruptcies. What mistakes can people make that impairs their ability to file and/or may prevent them from getting a bankruptcy discharge and getting rid of debts? What do people do wrong unintentionally or intentionally?
You Must Disclose All of Your Assets
John Reade: If someone fails to identify assets that they are required to list, and the United States Trustee’s Office discovers such asset omissions, and objects to the person’s ability to get a bankruptcy discharge and get rid of their debts due to fraud.
By then the individual has paid for a bankruptcy and the filing fee, but their bankruptcy discharge is denied, which means that the petitioner will not get rid of debts they wanted to get rid of.
Oregon or Federal Bankruptcy Exemptions Protect Assets, and It Is a Mistake Not to Utilize Them in a Bankruptcy Filing
I have seen someone who has filed for bankruptcy, particularly those who file themselves, not list the correct exemptions pursuant to Oregon bankruptcy exemptions or federal bankruptcy exemptions. These laws are in place to protect an asset that otherwise might not be protected. If an asset can be protected, an experienced bankruptcy attorney will protect it. A bankruptcy will have to be amended to accomplish this.
Sometimes a bankruptcy can be amended, and sometimes it can not be amended.
There is something called the “means test”. In order to qualify for a Chapter 7–which is probably the most common type of bankruptcy—one has to report all income from every source for the six months preceding the filing.
Timing Can Be Important, If You Plan to File for a Chapter 7 Bankruptcy
The total income from all sources for the previous six months, is divided by six and then multiplied by 12 to arrive at what’s called an annual income or median income. Should this calculation equal or exceed the median income, then that person may not be eligible to file for a Chapter 7 bankruptcy. Sometimes the timing of a Chapter 7 bankruptcy will result in one either initially being eligible, or initially not being eligible to file a Chapter 7 bankruptcy.
Fraudulent Asset Transfers Are Illegal, and Will Be Looked At Prior to a Bankruptcy Being Approved or a Discharge Granted
Interviewer: What about someone’s behavior prior to filing? Can an individual attempt to transfer assets, in an effort to protect the asset?
John Reade: That would create a potential problem in a bankruptcy. For example, if someone sold property or an asset for less than fair market value, or took their name off of the title and gave it to someone else prior to filing bankruptcy, each of those things could create serious problems.
Interviewer: Do people try to put their house in their wife’s or brother’s name?
John Reade: Yes. It’s called a fraudulent transfer, if it happens within four years prior to filing for bankruptcy. This can result in a bankruptcy discharge being denied, which means the person is still obligated to pay all the debts that he or she owes, and wanted to get rid of. What happens is the United States Trustee’s Office objects to the filing or files what’s called an adversary proceeding, saying, “The person committed a fraud against the court, so the person should not be afforded bankruptcy protection (i.e. get rid of the debts they wanted to get rid of).”
These issues can usually be resolved prior to filing, as opposed to someone filing themselves and an attorney trying to correct it after the fact.
Is It Advisable to Start Depleting Retirement Accounts to Try to Pay off Debt, before filing for Bankruptcy?
Interviewer: Do you see people ravage their retirement accounts and use that money, or take loans against their retirement account, to try to pay creditors/debts?
John Reade: Yes. People have come to my office and said, “I depleted all my retirement assets. Now I have no more money. So now I have no choice but to file for bankruptcy.” Retirement funds can be protected in a bankruptcy. They would not have needed to deplete their retirement accounts, prior to filing for bankruptcy.
Preferential Transfers: Do Not Pay Back Unsecured Loans from Friends, Family Members, and Relatives Prior to Filing for Bankruptcy
Interviewer: What if someone has multiple bills and, let’s say, they owe their uncle a considerable sum as well. The person feels badly about the uncle, so he pays the uncle and not their other creditors. Could this cause a problem filing for bankruptcy later on?
John Reade: Yes, there is something called a preferential transfer. What is says is: If you pay an unsecured creditor–who’s a family member or relative– $600 or more within one year prior to filing, this is defined as a preferential transfer. That means the family member or relative who received the $600 or more within one year prior to filing can be sued by the Chapter 7 trustee. The Chapter 7 Trustee is basically the person who oversees the bankruptcy process. The trustee will say, “Give that money to me, the trustee, so I can take it and distribute it evenly to all of the person’s unsecured creditors.”
Also, if $600 or more is paid to unsecured creditor within 90 days prior to filing, and that creditor is not a family or relative, that is also considered to be what’s called a preferential transfer. The Chapter 7 trustee could say, “That’s a preferential transfer and get the money back from the unsecured creditor that was paid $600. or more within 90 days prior to the person filing for bankruptcy, because those funds need to be distributed evenly to all this person’s unsecured creditors–not just particular creditor(s) chosen by the person filing for bankruptcy.”