Understanding Preferential Payments in a Chapter 7
As an Austin bankruptcy attorney I often see cases where payments have been made recently to certain creditors but not all. A “squeaky wheel” collector may have persuaded you to send a check, or you may have repaid a debt to your cousin, but, unless defined amounts of time have passed, these will cause you problems in a Chapter 7 filing. The Trustee may in fact be able to recapture these funds from those you repaid. There will be no penalty to you, but the recipients of the money probably won’t look very kindly on such a circumstance.
Here are some guidelines to consider for payments against unsecured debt. If you repaid a debt to someone considered an “insider” – essentially a relative – in excess of $600 within one year of filing, then that payment will be recognized as a preference and is subject to recapture. That doesn’t mean you can’t pay rent to or buy goods and services from that same relative during the one-year time frame, but if your funds are clearly repaying a pre-existing debt, you’ve created a preferential payment. These actions are not illegal, unless you can be shown to be intentionally and fraudulently disposing of funds that ought to be available equitably to all your creditors. You can, however, within the year borrow money from a relative to pay off an earmarked debt, e.g., a credit card you absolutely must have for business travel, in which case you’re essentially substituting one creditor for another. You can pay your helpful relative after your chapter 7 has concluded, if you wish.
If a creditor is not an insider, the relevant time frame is only 90 days. But the dollar amount mentioned in your filing is still $600. However, it’s not likely in our jurisdiction that a Trustee will pursue recapture of a debt unless it’s considerably greater than that. As your Austin bankruptcy lawyer, I will need to review your specific situation to advise you on whether now is the time to file or whether you should wait beyond these preferential periods to avoid the Trustee’s chasing around creditors you were trying in good faith to make whole.
The bankruptcy code presumes you were insolvent during the 90 days prior to filing. If you can prove you were not insolvent during the time when you made what would appear to be a preferential payment, then you may be able to get an exception. But, these exceptions aren’t easy to achieve unless you had some obviously unforeseen calamity that brought you to my office on short notice.
The bankruptcy code is designed to accomplish social good by giving people a fresh start after financial setbacks, and it’s also designed around a general notion of fairness. All creditors affected by your filing deserve to be treated equitably, and the guidelines on preferences are intended to accomplish just that.
May 11, 2013 at 3:56 pm | Category: Client Education
One Very Useful Online Tool to Help You Manage Your Credit Score
Credit Karma Home
As your Austin Bankruptcy Attorney I generally see damaged credit scores as my clients have fallen into situations that require my services. A Chapter 7 filing won’t help, and it remains on your credit report for ten years. But, normally within a year or less after discharge, your score will be higher than it was before you entered the process. I have written previously on this topic, but today I want to recommend an online service that can take some of the guesswork out of repairing your credit after you are discharged.
That service is Credit Karma. It’s free to use, and it provides you constant tracking of your score from one of the major credit reporting agencies. Among its features is a scorecard that shows you exactly what elements of your overall credit picture are good or bad for you. Establishing a pattern of consistent timely payments on any debts is one obvious good thing. Unused credit limits can be a plus, especially if you can keep your card balances below, say, 50% of their maximum limits. Applying for too many loans and thus getting your credit checked too often is a bad thing; if, for example, you shop a bunch of car dealers when trading vehicles and let them all check your credit to give you precise quotes, you’ll get dinged a bit. (You, that is, not your car!)
Credit Karma has a simulator where you can test the likely outcomes of decisions you are making that affect your credit score. When you register for the service, it collects all your credit data, and it can use that actual information to show you what happens if you open a new credit card account, or pay one off, or let some payments slide during a cash crunch. You might be surprised at what you learn from this simulator; for example, it might behoove you to open up a new credit card and put it in a drawer just to have some additional unused limit.
Credit Karma makes money by giving vendors like card companies the ability to advertise their products on the site in a way that is specifically tailored for you. If you decide to get a new credit card, you’ll see links to apply for cards that are designed specifically for persons in your category. Your odds of an approval may be much higher than if you just choose cards based on Jimmy Fallon or Alec Baldwin TV commercials. And, you want those odds to be high so you don’t waste your credit check bullets unnecessarily.
There are other Internet based credit services; you probably get spam ads for them quite often. Some allow you to buy access to your scores from all three of the major consumer reporting services, and they show you everything on your record. These may be needed if you suspect there’s an error in your credit history, and such errors are not uncommon. If you have been victim of identity theft, by all means you should be looking at the details of your history and getting corrections made.
As your bankruptcy lawyer, my intake process includes a credit check using a professional service. This provides me needed information beyond what you can typically find yourself in online consumer oriented products. It’s the official transcript of all your creditors and their addresses and becomes part of your Chapter 7 filing.
Think of your credit score not as a snapshot of one moment in time but as a process that you need to manage over the years after your discharge. You’ll bounce back faster than you might imagine if you use tools like Credit Karma to help you make the best decisions, and you’ll probably even qualify for better rates as you take on new debts. My direct services for you will have long been complete, but I will always remain hopeful that you are successful in rebuilding from the fresh start a Chapter 7 gives you.
April 26, 2013 at 2:49 pm | Category: Client Education
Liabilities for Business Debts in a Personal Chapter 7 Filing
Many of the clients I see as an Austin bankruptcy attorney have arrived at the need to file a Chapter 7 as a result of a business failure. You may have done your best to make your venture succeed, but sometimes markets shift quickly, competitors prevail, technologies change, and things just plain don’t work out. You may choose to put your business through a bankruptcy proceeding, or, as is more often the case, you may just wind it down informally. If your business has little in the way of assets to repay creditors, bearing the added expense and time of a business bankruptcy serves no good purpose.
If you are a sole proprietor and have been reporting your business income on Schedule C on your 1040, you and the business are indistinguishable in the eyes of creditors. You are personally liable, and if the creditors pressure you, a Chapter 7 may be your best and only resolution.
If however, you are an officer of a C Corporation or a Limited Liability Company, or if you operate as an S Corporation for its tax advantages, the law generally shields you from the debts taken on by the company itself. But, there are exceptions:
1. Personal Guarantees: If your venture has taken on some debt or signed an office lease, chances are high that you (and perhaps other officers) have personally guaranteed those obligations. When you shut down the company, you’ll still be obligated to pay those off. Even bankrupting the company provides no shield against that exposure.
2. Company Liabilities: If any funds are held in trust for government entities, like payroll tax withholdings and sales taxes collected but not remitted, you may have to cough those up out of your pocket. Corporate regulations vary considerably by state and change from time to time, but some states have gone further and will hold you liable for unpaid payroll, particularly if you let it accumulate knowing the company was headed into insolvency and would be unable to make good the obligations. In any event, if you are the one who keeps the books and pays the bills and fails to forward any taxes held in trust or to pay any earned wages, you can be held personably liable in Texas.
3. Fraudulent Transfers: If you removed assets, including intellectual property, customer lists, etc., from your company with the intention of getting a head start on a restart, you may be guilty of fraudulent transfers and be required to make those good for the benefit of the company’s creditors.
4. Failure to Follow Corporate Regulations: If you cease filing annual reports and meeting other routine corporate rules and continue to operate a business, you may transfer liabilities from the company to yourself. It is important to stay on top of these otherwise routine matters.
5. Personal Judgments Resulting from Corporate Dealings. If you’ve gotten sued along the way and have some creditor judgments against you as an individual, perhaps because you personally guaranteed a debt, those too will linger and demand your attention.
When you retain me as your Austin bankruptcy lawyer, I will review your personal exposure under Texas law to any of these types of liabilities resulting from shutting down a business. Some of these debts may be dischargeable in a personal Chapter 7, and some may not. Allow me to review them in the context of your overall circumstances, and we’ll find the best course of action for you.
April 17, 2013 at 10:30 am | Category: Client Education
Don’t Get Crossed Up by Cross Collateralization
Bankers will tell you that loans are based on the 3C’s – character, credit, and collateral. People who retain me as their Austin bankruptcy attorney are nearly always people of good character who have tried to maintain good credit, but, for one reason or another, they have fallen into difficultly in their financial lives. Their lenders at that point are looking to collateral, if any, as a source of repayment for a delinquent loan.
Collateral is a specific pledge of an identifiable asset against a loan. For example, your home and its associated land are the collateral for your mortgage. Your car and boat are the collateral for those loans. If you cannot pay the debt, your lender has the right to repossess your collateral and sell it to recover as much as possible, after which you are still responsible for any deficiency (shortfall) on that loan. In a Chapter 7 bankruptcy, as I have discussed in a previous post, there is a special provision in the law whereby you can “redeem” an automobile by paying the lender its fair market value, no matter what the loan amount. There is presumption that you will need a car, and the law gives you a break in that respect.
However, beware of what is called “cross-collateralization.” This is possible but uncommon in banks. But it is more or less standard practice in credit unions. What this means is that if, say, you have an automobile loan at your friendly neighborhood credit union and then sign up for a credit card at that same institution, the paperwork for the card probably says that your car also stands as collateral for your credit card balance. This may or may not be explained by your loan officer, and it is probably buried in the fine print somewhere. So, if you arrive at the need to file a Chapter 7, you may find that instead of a dischargeable credit card debt you have a secured credit card. To keep your car, you’ll need to “reaffirm” that card balance along with your car loan balance and budget to pay off both in full. There may be absolutely no ill intent here, and several years may have passed since you signed the papers you never read, but you’re trapped.
It is unusual for a credit union to loan against a home, but the good news is that if a home is part of a cross-collateral agreement, it is not subject to collection efforts in a Chapter 7. The Homestead Exemption still applies.
So, if you have loans with a credit union, as your bankruptcy lawyer I like to discuss all your bank and credit union relationships to look for cross-collateral agreements. I can’t undo them, but knowing they exist will affect my analysis of your situation and my strategy as to how best to handle your case. Don’t think you are alone with this; it’s a very common problem. And credit unions serve a valuable role in our financial system. It’s just one of many instances in which nuances of standard lending practices can have a significant effect on the outcome of a bankruptcy proceeding.
March 25, 2013 at 7:49 am | Category: Client Education
What Lifestyle Is Permissible after a Chapter 7?
As part of the process of filing a Chapter 7, I as your Austin bankruptcy attorney will help you determine the correct information to put on what are labeled as Schedules I and J. Read on for a bit of explanation of these forms.
Schedule I is a statement of your current income. Both you and your spouse must provide detailed income information, unless you are separated and are not filing jointly for bankruptcy. However, even if you are separated and are jointly on the hook for any of the debt you are seeking to discharge, you will both have to fill out the form. This schedule is pretty matter-of-fact. It’s looking for average monthly income going forward as best you can calculate it. And, you are asked to disclose any anticipated major changes, like an expected bonus somewhere down the road. The point is to be sure you convert all numbers to monthly averages, keeping in mind simple things like there are 4.33 weeks in a month if you get paid weekly. The right answers to this form are accurate answers.
Schedule J is the flip side – expenses. Here again you are looking for average monthly expenses for you and your family. At the bottom of J you are asked compare these expenses to the net income shown on Schedule I. If you are filing a Chapter 7, the Trustees are expecting to see something on the order of no more than $100 per month in positive monthly cash flow.
Your expense calculations deserve very careful attention to be sure you are including everything reasonable for you and your family. In the 17 stated categories there are 5 headings or sub-headings labeled “other.” So, if you have expenses not specifically requested, use those other lines. Look closely at what it costs your family to eat properly and healthy, to cover your medical out-of-pocket expenses, keep your house clean and maintained, take care of your pets, keep your vehicles in good shape, pay for your children’s educational expenses, attend to your personal appearance, and buy all the other many little consumables that you need monthly from your neighborhood grocery or drugstore. You can add some costs for reasonable vacations and holiday gift giving and for modest retirement deductions from your salary. Keep in mind too that you will need to allow for all the expenses and deposits related to moving if you are surrendering your house in the bankruptcy. If your first pass at the calculations shows too much monthly cash flow, I’ll help you look again to be sure you have taken into account all the expenses that are appropriate.
Fair warning, however: I recently observed a hearing on a case (not mine) where the Trustee objected to Schedule J because it provided for an overly lavish lifestyle. You probably can’t get away with budgeting for private school tuition for 4 children, country and hunting club dues, and lease payments on a Porsche and a Jaguar. If you are entitled to Chapter 7 relief from your debts, you are deserving of a truly fresh start under reasonable living conditions, but you can’t produce Schedules I and J that show a large income being consumed by too much luxury spending. The Trustee will use that excuse to bump you to a Chapter 13, where you sacrifice those luxuries and use the cash for years in a structured payout plan to satisfy your creditors.
March 3, 2013 at 7:01 pm | Category: Client Education