“Three Things Not To Do Before Filing Bankruptcy”

THREE THINGS NOT TO DO BEFORE FILING BANKRUPTCY

Many times when I first meet with clients about a potential bankruptcy filing, I learn about various property transfers made and transactions they have recently engaged in.   While, in most cases, the transfers or transactions are not illegal, they may be highly suspect or might be subject to being “clawed back” or “unwound” by a Bankruptcy Trustee, if a bankruptcy filing is made.  Sometimes, it is possible to avoid the Trustee’s claims of preferential or fraudulent transfer, and the like, simply by waiting the requisite period of time to run before filing.  However, sometimes, as the saying goes, once the toothpaste is out of the tube, you cannot put it back.   For example, as there is a 2 year look-back period under the Bankruptcy Code for avoidance of fraudulent transfers (those transfers of property for less than fair value) and a 6 year look-back period for avoidance of fraudulent transfers – now called voidable transfers –  under state law (state laws are incorporated under the Bankruptcy Code), many times it is simply not possible to wait it out.  How much better it might be to simply not have made such transfers in the first place and thus not have to deal with these issues.  This article will briefly discuss what you should NOT do if you are considering making a bankruptcy filing, and what you should  do.

First of all, you should not make payments on unsecured debts (such as credit card bills, medical bills, unsecured loans and the like) that would total over $600 in the 3 months prior to a bankruptcy filing.   Payments made to such creditors may likely cause the Trustee to send the creditors involved a demand letter for return of such funds to him/her, as an avoidable preferential transfer or even cause the Trustee to file suit to recover such funds.  (A preference is a payment on an unsecured debt, made within 90 days pre-petition, or up to a year back for insiders, such as relatives, that allows such creditor to receive payment of more than they would have received had such payment not been made versus what they might receive from the bankruptcy estate;  in virtually every case, unless you have a 100% distribution to creditors the payment will be deemed to be preferential and avoidable).  Thus, paying on an unsecured debt is almost like throwing money away; money you could better use to pay on debts you cannot discharge – like most tax obligations – or exempt (keep) to assist with your fresh start; or to otherwise save to employ competent bankruptcy counsel who will likely expect payment up front. (Note, if you have a mortgage on a house, or a secured auto loan, and want to keep the house or car, you should keep making the regular payments on those secured debts up until you file as they are not recoverable by a Trustee and this will help you retain that particular type of collateral).

Second, you should not transfer property out of your name on the eve of bankruptcy, make gifts of property to others, or make property joint with someone else, including your spouse, unless there is an exchange of fair value or consideration (money or property) done at the time of the transfer.  For example, transferring title to real estate from individual ownership to ownership as tenants by the entireties (between and husband and wife) is very likely to cause the Trustee to take action to avoid (set aside and recover) such transfer as fraudulent.  If successful, the Trustee would then very likely sell such property you might otherwise have been able to keep and you probably will not be able to exempt it.  Similarly, a transfer of property to an unsecured creditor to satisfy its claim may be preferential and avoidable by a Trustee.

Third, don’t try to do this yourself.  Rather, spend a little money and employ knowledgeable bankruptcy counsel.  This may sound a little self-serving, but it isn’t.  I have been representing Trustees and Debtors for almost 40 years and I cannot tell you how many times I have seen people either trying to represent themselves, or engaging an attorney that does not know the first thing about bankruptcy, and thus they proceed to make a real mess of things.  (I believe the saying goes:  “He who has himself as a client is a fool”).   They transfer property out which they can then not exempt (keep), they do not claim the proper exemptions and thus wind-up literally throwing away potentially thousands of dollars they otherwise could have retained, or even jump the gun and file too soon and put certain transactions “in play” that otherwise would have been insulated from recovery, or may even jeopardize their ability to obtain a bankruptcy discharge of their debts if they have previously filed for bankruptcy relief.

As Ben Franklin famously said: “Don’t be pennywise and pound foolish”.  Save your hard earned money and pay to get the job done right. If you have encountered financial difficulties and believe you are in need of bankruptcy relief, please contact the knowledgeable professionals at Damon, Ver Merris, Boyko & Witte, PLC, at (616) 975-9951.  We can guide you through the process, assist you with suitable and legitimate pre-bankruptcy planning, and choose the appropriate exemptions which will help you keep the maximum amount of property you are entitled to retain, under the law.  – Larry A. Ver Merris  /  February 12, 2018

While this posting originates from a law office, none of the contents should, in any way, be considered legal advice. If you have not signed a retention letter describing the legal services to be provided and the amount to be paid for such services, you are not a client of this firm.