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Plan Before You File
Absent an emergency; it may pay to do some bankruptcy planning:
- Know what debt is nondischargeable
- Maximize exemptions
- Predict what transfers might be avoided
- Avoid set-off at the bank
- Stop using credit
- What options are available?
You must get credit counseling from a nonprofit agency approved in the district in which you file for bankruptcy.
If your income has varied in the past six months, analyze whether you benefit by filing sooner or waiting. Eligibility to file Chapter 7 and the terms of a Chapter 13 plan are now driven by your income in the six months before you file. See means test.
What Debt Is Dischargeable
If the bankruptcy is not going to be filed immediately, know what debt will survive the Chapter 7 filing in planning your financial life in the interim.
It may be to your advantage to maximize your payments on debts that are not going to be discharged (like taxes, secured debt and family support) and cease paying dischargeable debts.
If all of your debt is dischargeable, you may be able to accumulate cash (to pay your attorney fees for filing) by not making payments on that debt.
Cash advances on a credit card aggregating over $750 made within 70 days before the case is filed are presumed to be fraudulent and therefore nondischargeable. Any charges to credit cards after you decide to file bankruptcy or even meet with a bankruptcy lawyer are arguably nondischargeable because you didn’t have an intent to pay the bill when you made the charge.
If taxes are involved, know exactly which taxes are priority. That means knowing about extensions of time to file tax returns (for calculating the “three-year rule”), when a tax was assessed (the “240-day rule”), and when tardy tax returns were actually filed (the “two-year rule”) as well as any events that toll the running of the statute like offers in compromise. Make sure you discuss these issues with your bankruptcy attorney.
Note that recent changes to the discharge provisions make loans used to pay nondischargeable federal taxes also nondischargeable.
Know what you are permitted to exempt from the claims of your creditors.
If you have significant nonexempt assets, get a good bankruptcy attorney regarding the conversion of nonexempt value into exempt value.
Courts are variable about what constitutes good bankruptcy planning versus what is a scheme to “hinder, delay or defraud creditors.” Maximizing exemptions is traditionally permissible and hindering your creditors is grounds for denial of discharge. The difference between these two ends is art, not science.
If your assets exceed the exemptions available in your state, bankruptcy counsel can evaluate the extent to which those assets can be consumed or converted to exempt assets within the tolerances of the local judges. Having substantial nonexempt assets may also suggest filing Chapter 13 rather than Chapter 7. Make sure you discuss these issues with your bankruptcy attorney.
Anticipating Avoidance Actions
Debtors frequently want to protect creditors who are friends or family members from having to disgorge to the bankruptcy trustee payments made by the debtor or to pay off a credit card so they can keep it after the bankruptcy.
Payments made, or liens perfected, within 90 days of the bankruptcy may be avoided by the trustee as preferences. If the recipient of the transfer is an “insider,” the look-back period is 12 months. “Insider” is defined in 11 U.S.C. 101 and includes family members, partners and corporations in which the debtor is a decision-maker.
It is not wrong for the debtor to make payment to one creditor over another on genuine debts. It is the creditor, not the debtor, who stands to lose if the trustee elects to avoid a payment as a preference.
If you want to provide for some creditors over others, you need to know whether that creditor is an insider and when the transfer is made for purposes of the Bankruptcy Code.
The cost of filing suit to recover preferences from creditors usually limits trustee’s preference actions to transfers in the thousands of dollars.
As an alternative to paying the creditor’s claim before bankruptcy, the debtor can also reaffirm a secured debt after filing bankruptcy or just pay the debt voluntarily after bankruptcy, without a formal reaffirmation. Make sure you discuss these issues with your bankruptcy attorney.
Money On Deposit Vulnerable
If you bank or have investments at an institution to which you owe money, on a loan or a credit card, that institution probably has the right under state law to take your money on deposit and apply it to your debt owing to them.
Thus, if you file bankruptcy owing on your Big Bank credit card, Big Bank can take the contents of your checking account at Big Bank on the day you file to pay the credit card bill.
So, good planning says, “Don’t have your assets in institutions to which you owe money” on the day you file bankruptcy.
Although the right of set-off should not apply to funds deposited after the bankruptcy case is filed, the chances for bureaucratic snafus are ever-present. Better safe than embroiled in telling a bank they violated the law.
We often advise clients to open new accounts before they file and move all of their cash and automatic deposit instructions to new banks.
Stop Using Credit
Evaluating credit card discharge issues — Credit card issuers sometimes challenge the discharge of their debt in bankruptcy by filing an adversary proceeding claiming that the debt was incurred by fraud and therefore should be excluded from the discharge under Sec.523(a)(2). This is sometimes called a nondischargeability action.
Credit card debt may be nondischargeable in bankruptcy under either of two legal theories:
- The application submitted to get the card was fraudulent.
- The card was used without an intent to repay; this is far more common.
Hot buttons for card issuers — While each card issuer has a different practice about nondischargeability actions, each of the following circumstances probably increases the likelihood that the debt may be subject to challenge by the creditor:
- Increase in credit card use shortly before filing
- Newly issued card
- Large cash advances in months before filing
- Use of card for recent travel or vacations
- Pattern of borrowing on one card to make payments on others
- Exceeding credit limit
- Using card when unemployed or without reasonable belief that the debt can be repaid
- Large balance at filing
- Charges made after consulting a bankruptcy attorney
Any charges to credit cards made after you have consulted with a bankruptcy attorney are likely to be challenged by the creditor, so we recommend that you stop using your credit cards as soon as you decide to file bankruptcy. Once you have decided to file bankruptcy, you can hardly have an intention to repay the credit card charges. Using a card knowing you do not intend to repay the debt incurred is fraud.
Also, cash advances over $1,075 obtained within 60 days of the bankruptcy filing or purchases of luxury goods within 60 days of the bankruptcy filing are presumed by the courts to be nondischargeable.
Generally, the longer the length of time between any particular use and the bankruptcy filing, the less likely the use will trigger a challenge to dischargeability. A complaint for dischargeability based on fraudulent use of the card may seek nondischargeability for certain charges, not necessarily the entire balance. Make sure you discuss these issues with your bankruptcy attorney.
What Options Are Available?
If you are concerned about a challenge by a credit card issuer to the discharge of a particular debt, several strategies are available:
- Wait to file bankruptcy so as to put more time and/or more payments on the account between the questionable usage and the bankruptcy filing.
- Settle with any objecting creditor if and when it files a nondischargeability action.
- Contest the suit at trial. If you win, you may recover your attorney fees incurred to defend the action.
We encourage you to call 515-421-9068 or use our online contact form to schedule a free one-hour consultation with a lawyer who emphasizes clear communication and cost-efficient solutions. We will review your situation and recommend an effective course of action.
We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.