Preferences – Rochester Bankruptcy and Debt Relief – Rochester, NY Bankruptcy Attorney

Dischargeability of Debt and Objections by Creditors

When debtors meet with me and tell me that they want to file for bankruptcy, I ask them questions about their debts, assets, and their financial affairs over the last few years. I also ask is how long ago they last used their credit cards. If they tell me that the credit cards were used within 90 days prior to the filing, I ask them to provide me with their credit card statements and information with regard to what was bought. All of this information helps me to assess whether I am likely to see potential objections from creditors with regard to dischargeability of one or more debts.

According to 11 U.S.C. §523(a)(2), a debt is presumed to be nondischargeable if a Debtor charges more than $600 for luxury goods on a credit card with in 90 days, or takes cash advances of more than $875 within 70 days of filing for bankruptcy. This presumption can be rebutted, but the burden is on the debtor to prove that the purchases did not involve luxury goods or services.

Another reason a creditor may object to the discharge is fraud and misrepresentation of debtors’ assets or income in order to obtain credit. If debtors misrepresent their financial condition in order to obtain a loan or credit line, and the creditor relies upon such misrepresentation when agreeing to extend credit, the creditor can object. For example, if the debtor earned $15,000 a year, but stated on the credit card application that he was earning $50,000 per year in order to get get approved, this would be a material representation likely to result in objections being filed.

Hiding an asset or failing to disclose it in a bankruptcy proceeding are also grounds to challenge a debtor’s discharge. For example, if you own an investment property, especially one with equity, which could not be protected under the Bankruptcy Code, and fail to inform the bankruptcy court of this asset, then a creditor may challenge debtor’s right to a discharge pursuant to 11 U.S.C. §727. Under such circumstances, a debtor may also get charged criminally.

Finally, the transfer of assets to family members or others just before filing bankruptcy can cause a creditor to challenge the bankruptcy case. It is particularly a problem if the asset transferred would not have been fully exempt in Chapter 7 Bankruptcy, and the transfer was made with the intent to deprive a creditor of a benefit. If the debtor does this, either the bankruptcy trustee or any creditor who might have received a benefit from the sale of this asset may allege you committed a fraudulent transfer of an asset. The Federal look-back period under 11 U.S.C. §548 and New York’s look-back period is six years.

In view of the above, I always advise my clients to stop using any credit cards at least 90 days prior to filing for bankruptcy, disclose all their assets, and be honest with regard to any financial transactions.

If you contemplating filing Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, or are dealing with debt problems in Western New York, including Rochester, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a Rochester, NY, bankruptcy lawyer.

Top Five Things Not To Do Before Filing Bankruptcy

Many people try to engage in financial planning once they make a decision to file either Chapter 7 or Chapter 13 bankruptcy. While such planning can be helpful, there are many potential dangers for the unwary debtors who do not involve a bankruptcy attorney in this process. Here is a list of top five things not do since they may cause significant problems in your bankruptcy case.

Number 5: Stop using credit cards once you decide to file.

In bankruptcy, honesty is the best policy. Using credit cards when you have no intention to repay may result in the debt being nondischargeable, especially where credit cards are being used to purchase luxury goods or for vacations, or cash withdrawals are made. The bankruptcy code gives credit card issuers a number of advantages when credit cards are used just prior to filing bankruptcy. If a creditor decides to file objections, the bankruptcy court may determine that the debt is nondischargeable. Before you use a credit card convenience check, transfer a credit card balance, take a cash advance, or go on a spending spree, debtors should speak with a bankruptcy attorney.

Number 4: Don’t transfer property before filing bankruptcy.

The bankruptcy petition requires that debtors identify all financial transfers made before their bankruptcy filing. Further, during a typical meeting of the creditors, the bankruptcy trustee will usually ask about any transfers, and will ask debtors about transfers of real property made within the last 6 years. The bankruptcy trustee will review any transfers within the last year, and any transfers that violate preference rules can be voided by the trustee. If the transfer is voided, the debtor may lose the right to protect such property, and the recipient of the property will have to return that property to the trustee. Before selling or transferring property, debtors should speak with a bankruptcy attorney.

Number 3: Don’t repay loans to friends or family.

Because of the preference rules, any transactions such as repayment of loans to relatives or friends can be voided by the bankruptcy trustee as preference. Once the trustee determines that the transaction is a preference, the trustee then can can recover such funds from your family members or friends, and use them to pay your creditors. Before paying back debts owed to family members or friends, debtors should speak with a bankruptcy attorney.

Number 2: Don’t pay more than $600 to one creditor.

Like payments to family members or friends, any payments that exceed $600 and made to any one creditor within 90 days of the bankruptcy filing, can be avoided as a preference. While those payments will be recovered by the trustee from the recipients, it may make more sense to simply not make such payments and preserve the money. Before paying making significant payments to their creditors within 90 days prior to their bankruptcy filing, debtors should speak with a bankruptcy attorney.

Number 1: Don’t cash out retirement plans or 401k plans to pay creditors.

Since retirement plans are fully protected by the Bankruptcy Code, debtors should not withdraw retirement funds to pay creditors. Not only such payments are likely to be voided as preferences, they are also likely to result in taxable consequences to the debtors. Also, once the money is withdrawn, it may lose its protected status, and it is possible that either the creditors or, eventually, bankruptcy trustee may take it.

The bankruptcy code contains many dangers for the unwary. A bankruptcy attorney can help you avoid these common mistakes. It is always a good idea to engage in bankruptcy planning and discuss your financial situation with a bankruptcy attorney.

Do Divorce Settlements Survive Bankruptcy?

I have previously written about interplay between divorce, family court proceedings and bankruptcy, as well as other issues involving interplay between bankruptcy and family law. One issue that is highly significant in situations where one of the former spouses is about to file a Chapter 7 Bankruptcy or Chapter 13 Bankruptcy is whether the bankruptcy trusee will seek to undo a divorce settlement agreement.

With bankruptcy filings being so common, and divorce being a major reason for seeking bankruptcy relief, divorce lawyers are frequently concerned as to whether a divorce settlement will be upheld in a bankruptcy proceeding.

There are valid reasons to be cautious since if a debtor transfers a valuable asset to a spouse (or soon-to-be ex-spouse) prior to filing for bankruptcy, and the debtor-spouse does not receive reasonable value in return, then the transfer may be deemed to be a “fraudulent transfer.” In such a case, the bankruptcy trustee can sue the person who received the asset to recover it for the bankruptcy estate, so that all creditors can share in its value. As with any other situations involving fraudulent transfers, the debtor must have been insolvent at the time of transfer.

In order to demonstrate that a transfer was not a fraudulent transfer, the party who received the transfer would have to show that there was “reasonably equivalent value.” It is common for a divorcing spouse to settle the divorce case by giving the other spouse valuable assets such as an interest in real estate, bank accounts, investments, or other personal property. In those situations, both parties do not want a bankruptcy trustee to try to set such transfers aside.

There was a time when some of the bankruptcy courts have held that innocent spouses who received such a transfer were no different from any other party who received a large transfer without sufficient consideration. However, a case decided by the United States Circuit Court of Appeals in June of 2009 will give many divorcing spouses a greater degree of certainty that a trustee will not be able to set aside a divorce settlement.

The decision in Bledsoe v. Bledsoe, 569 F.3d 1106 (9th Cir. 2009) this issue by addressing when a bankruptcy court may avoid a transfer made pursuant to a state-court divorce decree. The Circuit Court affirmed that decision and held that a trustee can only set aside a matrimonial settlement if he alleges and proves “extrinsic fraud.” The Court also held that a divorce decree that follows from a regularly conducted, contested divorce proceeding conclusively establishes “reasonably equivalent value” in the absence of fraud or collusion. Since the Second Circuit has not addressed this issue, Bledsoe is valid law in the bankruptcy courts in New York. At the same time, the bankruptcy court, here in Rochester, New York, and elsewhere, will always review the totality of the facts.

In order for a divorce settlement to be upheld by the bankruptcy court, it must be ratified by the matrimonial court. That means that any transfer should be accurately described in a stipulation of settlement. In addition, the stipulation must be specifically referred to and incorporated in the judgment of divorce. It is not enough that the parties merely stipulate to a settlement; the court must specifically approve the settlement. In a typical judgment of divorce, this is accomplished by stating that the stipulation survives the judgment of divorce and is not merged into it.

If you contemplating filing Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, or are dealing with debt problems in Western New York, including Rochester, New York, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a Rochester, NY, bankruptcy lawyer.

Bankruptcy and Repayment of Debts Owed to Relatives

Occasionally there is a need to borrow money from relatives. Regardless of the size of the loan, the obligation to repay the debt to a family member is usually pretty powerful. Most people try to repay those debts first, before paying their other creditors. However, if you are experiencing financial problems, repaying your relatives prior to filing bankruptcy is not a good idea. As discussed below, any such loans can be repaid, but they should be repaid after the bankruptcy is filed.

The reason that the debtor should not repay debts owed to relatives prior to the filing is because of the “insider” problem. Your relatives, especially close ones, are considered to be “insiders” under the Bankruptcy Code’s definition of an insider, which includes a “relative of the debtor.” 11 U.S.C. § 101(31).

Because they are related to you, any payments to insiders within the applicable period are treated as preferences. The Bankruptcy Code states that a “preference” occurs when:

the debtor transfers something “to or for the benefit of a creditor;”
for a debt “owed by the debtor before [the] transfer was made;”
“made while the debtor was insolvent” (that is, the debtor’s debts were greater than his assets);
made within 90 days of bankruptcy, or, if an insider receives the transfer, within one year of bankruptcy; and
and the transfer “enables [the] creditor to receive more than [the] creditor would have received” (1) in a Chapter 7 case, (2) than “if the transfer had not been made,” and (3) “the creditor received payment of such debt to the extent provided in the [Bankruptcy Code].”

Generally, according to the Bankruptcy Code, creditors of the same type, called “class” should be treated the same. Because of this, the Bankruptcy Code looks back anywhere from 90 days to one year for preferential transfers or “preferences.” The Code presumes, not incorrectly, that a debtor would rather pay a relative rather than other creditors like credit card issuers.

As a result, the bankruptcy trustee will examine any debts repaid during the preference period. If the trustee believes a preference occurred and there are no defenses, the trustee can sue the person or entity who received the payments.

Because of these rules, you should hold making payments to the relatives prior to the filing. You can always pay back those debts after your bankruptcy case is over.

If you’ve already paid your relatives back during the one-year preference period, there are some solutions. First, if the payments are under $600, the trustee can’t sue your relative for the payments, since the preference falls within the “small preference” exception. Also, if the payments are $600 or more, but not that much–say not more than $1,000, the trustee still might decide not to bother with the transfer since the cost of recovery and administrative costs would reduce the benefit to the bankruptcy estate. Trustees don’t like administering bankruptcy estates where the asset values don’t justify the cost and effort of administration.

Another defense is that those payments may be “ordinary course” payments. In other words, it may be normal in both the relative’s financial affairs and the debtor’s for borrow and repay money, and the money was paid back in accordance with agreed upon terms. This is called the “ordinary course of business” defense.

The third available defense is that the relative gave “new value” in exchange for the payment. For example, the relative made another loan or gave you something else of value in return.

Fourth approach to addressing this problem, if the preference occurred close to a year prior to the time in which you plan on filing your bankruptcy, you can simply wait out the year.

Finally, the transfer can be undone by having the relative refund the money. Unfortunately, this may create another problem which relates to the availability of cash exemption in the bankruptcy filing. If you can exempt the refunded money, you may repay the debt after your case is over.

Chapter 7 Bankruptcy and Stripping of Unsecured Second Mortgage

One question that I am often asked is whether the unsecured second or third mortgage on the property owned by the debtor can be stripped in Chapter 7 Bankruptcy. In Chapter 13 Bankruptcy, the unsecured second mortgage can be stripped by bringing a Ponds motion.

Unfortunately, in Chapter 7 Bankruptcy, the unsecured second or third mortgage cannot be stripped. In a recent decision which also applies to the bankruptcy cases in Rochester, New York, In re Grano, the Buffalo Bankruptcy Judge Bucki held that in Chapter 7 Bankruptcy cases, the debtors cannot avoid wholly unsecured second or third mortgages.

Joseph and Ann Grano owned a residence in the Town of Amherst, New York. After filing a Chapter 7 Bankruptcy petition, they commenced the adversary proceeding against Wells Fargo Bank, N.A., to avoid a second mortgage. In their complaint, they alleged that their real estate has a current fair market value of $445,000 and that it is encumbered by two mortgages: a first lien with an outstanding principal balance of $511,000, and the second mortgage of Wells Fargo with a balance of $95,837.60.

Granos asserted that they can avoid the second mortgage pursuant to the authority of 11 U.S.C. § 506(a) and (d). In lieu of an answer, Wells Fargo moved to dismiss the complaint for failure to state a cause of action. In relevant part, section 506(a)(1) of the Bankruptcy Code states that “[a]n allowed claim of a creditor secured by a lien on property in which the estate has an interest . . . is a secured claim to the extent of the value of such creditor’s interest in the estate’s interest in such property . . . and is an unsecured claim to the extent that the value of such creditor’s interest . . . is less than the amount of such allowed claim.” Asserting that the first mortgage secures a debt greater than the value of the property, the debtors argue that in its status as a second mortgagee, Wells Fargo retains only an unsecured claim. Subject to exceptions not here present, 11 U.S.C. § 506(d) states that “[t]o the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void.” In reliance upon this later subdivision, the debtors commenced their adversary proceeding to avoid the second mortgage of Wells Fargo.

In Dewsnup, the Supreme Court accepted the position of the secured creditor, that “the words ‘allowed secured claim’ in §506(d) need not be read as an indivisible term of art defined by reference to § 506(a).” Instead, the language of section 506(d) “should be read term-by-term to refer to any claim that is, first, allowed, and, second, secured. Because there is no question that the claim at issue here has been ‘allowed’ pursuant to §502 of the Code and is secured by a lien with recourse to the underlying collateral, it does not come within the scope of §506(d), which voids only liens corresponding to claims that have not been allowed and secured.” 502 U.S.at 415. Effectively, therefore, the Supreme Court refused to recognize section 506(d) as a grant of authority to a debtor in Chapter 7 to “strip-down” or cancel the lien of an undersecured mortgage.

In contrast to Chapter 7, debtors in Chapter 13 may assert rights under special statutory provisions for the treatment of secured claims. Specifically, 11 U.S.C. § 1322(b)(2) provides that a Chapter 13 plan may “modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor’s principal residence, or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims.” InNobelman v. American Savings Bank, 508 U.S. 324 (1993), the Supreme Court held that the language of section 1322(b)(2) precluded the bifurcation of an undersecured homestead mortgage into secured and unsecured claims. Consequently, to the extent that a homestead has value to collateralize any portion of a mortgage, a chapter 13 plan must treat that lien as fully secured. However, in In re Pond, 252 F.3d 122 (2001), the Second Circuit distinguished those circumstances where the homestead lacks equity to collateralize any portion of an inferior lien. In this special circumstance, because the lien is wholly unsecured, the debtors “are not ‘holders of . . . a claim secured only by a security interest in . . . the debtor’s principal residence,’ 11 U.S.C. § 1322(b)(2), and their rights in the lien are not protected under the antimodification exception of Section 1322(b)(2).” 252 F.3d at 127.

In the present instance, Mr. and Mrs. Grano contended that this court should adopt for Chapter 7 the same exception that the Second Circuit has recognized for cases in Chapter 13, to the effect of permitting the avoidance of secondary liens that are totally undercollateralized. Unfortunately, this argument overlooks the unique statutory predicate of Chapter 13. In allowing a debtor in Chapter 13 to avoid a fully unsecured homestead mortgage, the decision in In re Pond utilized the authority of 11 U.S.C. § 1322(b)(2). No parallel provision applies in Chapter 7. The court concluded that notwithstanding the absence of equity beyond superior liens, the debtors may not avoid the second mortgage of Wells Fargo Bank, N.A.

This decision forces the debtors and their bankruptcy lawyer to engage in a cost benefit analysis in a situation where there is a wholly unsecured second or mortgage. Assuming the debtors can file either Chapter 7 or Chapter 13 Bankruptcy, the benefit of filing Chapter 7 Bankruptcy and discharging all unsecured debt, should be compared to the benefit of a Chapter 13 Bankruptcy plan payments over 5 years, and a likely discharge of the unsecured second or third mortgage. Assuming the debtors wish to retain their residence, the comparison of two figures should point them in the right direction.

Mistakes to Avoid When Filing For Chapter 7 or Chapter 13 Bankruptcy in New York

While bankruptcy appears to be a straight forward process, there are many pitfalls for the unwary. Some actions taken by the debtor before filing Chapter 7 or Chapter 13 bankruptcy in New York, may result in serious consequences. Here are some areas where mistakes are commonly made

1. Debts owed to family and friends. I would strongly recommend that you don’t try to pay back the debts owed to family and friends in anticipation of your bankruptcy filing. A trustee in a bankruptcy case can reach back and undo any such transactions that took place within one year prior to your bankruptcy filing. The concept is known as preference. It is intended to prevent debtors from favoring some creditors over other creditors by transferring assets to a third party and then claiming they have nothing left. While you may not be aware of preference, and your actions are responsible and just, they are likely to be undone by the bankruptcy trustee.

2. Disclose your financial affairs to your bankruptcy lawyer. Always be honest with your lawyer about your assets and your financial transactions. I am on your side and am able to help you, but I need to know everything that has taken place in order to take full benefit of the bankruptcy law. I can’t do that unless I have all the information available. Also, if I am not aware of certain facts, and if they come to light during the case or even after your discharge that you’ve withheld information or hid assets, you’ll not only lose the assets that were hidden, but the entire discharge can be undone. This means all of the bankruptcy protection created by your bankruptcy is lost and creditors can once again pursue you.

3. Don’t withdraw your retirement money. Sometimes, this is the easy route out of financial difficulties since the debtor may think that he or she may need more cash on hand if you’re getting ready to file for bankruptcy. However, since retirement plans such as IRAs and your 401(k) are actually protected from creditors by bankruptcy exemptions in New York. If you take the cash out and try to keep it, it will become part of the debtor’s estate. Additionally, you’ll owe pay taxes on the money you withdraw.

4. Don’t disregard pending lawsuits against you. While the automatic stay will protect you from any pending actions, once the bankruptcy is filed, any lawsuits pending prior to the filing should not be allowed to go into default. Lawsuits, if permitted to go into default have consequences and may result in adverse finding that may be difficult to undo during the bankruptcy. Do not treat law suits the same way as creditors. While the creditors will primarily call you and send you letters, lawsuits can have serious consequences that can be implemented before you file. Therefore, make sure that you, or your attorney, respond to any pending actions.

Of course, the most important step in all of this is to make sure you’re working with a knowledgeable, experienced and trustworthy bankruptcy lawyer. A good bankruptcy lawyer will help you successfully navigate the bankruptcy process and help ensure that you avoid all of the potential problems.

If you are dealing with debt problems in Western New York, including Rochester, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a New York bankruptcy lawyer.

Bankruptcy Basics – Preferences

The Bankruptcy Code permits a trustee to recover from creditors payments made shortly before the bankruptcy filing, where the payment gave the creditor more than other creditors in a similar position would get through the bankruptcy process.

The policy behind the statute is to reduce the advantages that a creditor might get by suing or by collection activities that force the debtor into bankruptcy. That is accomplished by making payments received in the 90 days before the filing recoverable in bankruptcy by the trustee.

It is neither wrong for the debtor to make a preferential payment, nor is it wrong for a creditor to accept such payment. The preference statutes are simply an attempt to achieve equity between creditors.

Bankruptcy Code §547 defines a preference as:

Payment on an antecedent (as opposed to current) debt;
Made while the debtor was insolvent;
To a non-insider creditor, within 90 days of the filing of the bankruptcy;
That allows the creditor to receive more on its claim than it would have, had the payment not been made and the claim paid through the bankruptcy proceeding.

Any payments to a fully secured creditor are not usually preferences, because the creditor would not get more than he would have in bankruptcy, where the creditor would get the value of the collateral.

While the look back period for preferences is usually 90 days, the bankruptcy code also permits the recovery of payments on claims owed to insiders, such as relatives, friends, corporate officers or directors, or related entities, made within 1 year of the bankruptcy filing. This provision attempts to prevent the debtor from paying relatives, friends and business decision makers at the expense of other creditors.

Preference recovery is generally a matter between the trustee and a creditor. When the creditor is a third party, the debtor may not care very much. When the creditor in question is a relative or a friend, however, most debtors are very concerned. If a bankruptcy case is filed within a year of these payments to relatives and friends, the trustee may take the money from the friend or relative the debtor paid, and redistribute it to creditors in accordance with the bankruptcy laws.

There are some procedural issues that apply to preferences. For example, a payment made by check is effective as of the date the check cleared, not the date on the check or the date it was mailed. There are also some defenses to preferences, usually available in a business rather than a consumer setting. Preferences can be voluntary payments, like a check sent in payment of an invoice, or involuntary, like attaching a bank account.

A debtor needs someone with knowledge and experience in these issue on his side. One of the most valuable things an experienced bankruptcy attorney can do is prevent problems for you, and unintended consequences for your family members or business partners. It is also best to seek such advice before you make that payment, or transfer that asset. Lawyers can control damage in most situations, but we prefer to prevent a problem arising in the first place and this can be accomplished in most situation with pre-bankruptcy planning.

If you are dealing with debt problems in Rochester, New York; Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation.