Preference sounds good, right? Maybe, maybe not. If you pay child support or taxes before paying other creditors, that’s okay. If you make your house or car payment before paying your Visa bill, that’s okay. So what can’t I do?

Insider Preference Payments

You can’t pay your mom back that $2,000 she loaned you before you pay the Visa bill, if you do it within one year before you file for bankruptcy. It is considered a preference and the trustee can set it aside. In other words the trustee can sue your mom to recover the $2,000 payment. Why can they do that? Because it is considered unfair under the U.S. Bankruptcy Code. The code is concerned with fairness all around. Fairness to you the debtor and to all the creditors that you owe money to.

You can’t make any preferential payment to a friend or family member in the year before filing bankruptcy or the trustee can recover it. So be careful of repaying your uncle, sister, brother, mother, father or friend in the one year period before filing for a bankruptcy. Your brother would likely be upset to find out that the money you gave him to repay your loan will be taken by the trustee. Either wait to file the bankruptcy so a full year passes, or wait to make the payment until after the bankruptcy case. There is nothing in the law that stops you from paying back a loan after it has been discharged in bankruptcy.

What About Other Creditors?

Any payment over $600 to a credit card company or other creditor (medical provider, personal loan, other loans) within 90 days of filing bankruptcy is also a preference payment that can be set aside.

A preference payment doesn’t have to be cash, check or money. It can also be a transfer of your property. For example, you owe a friend some money and they agree to take your bicycle in trade. Talk to a knowledgeable local bankruptcy lawyer about your payments. They’ll ask you questions and dig into your facts so you can avoid any unpleasant surprises.

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O is for Organize

Organizing is something that may be hard to do. Many of my clients have been putting their heads in the sand and leave mail unopened and unorganized until they see me. It is a normal tendency to ignore things that feel out of control. When those bills and collection letters come flooding into your mail, it can be overwhelming.

The first step to getting a handle on things is to tackle organizing those bills and other unopened mail. It doesn’t matter what is in there for now. It could be unopened mail, opened mail, or all mixed up. You need to find and organize all your financial information before you can file a chapter 7, or chapter 13 bankruptcy.

Set aside a block of time, even if it is only a twenty or thirty minute window. Gather up all that paper and find a place to begin to sort it. Somewhere you can leave the project and return to it is ideal. Have several bags or boxes handy. You may want one for trash, one for recycling and one for documents that need to be shredded. Label each bag or box.

Start with the steps below and get as far as you can in your scheduled time. When you are ready set aside another block of time and continue through the steps. Repeat until complete.

Organizing Mail Steps

  1. Open it everything. Use a letter opener or some other tool to make it easier. Toss all the envelopes that the bills and statement arrived in into your recycle bag. There is no need to keep that extra outside wrapper.
  2. If you are unable to pay the bills and are planning to file bankruptcy, or you pay your bills online, you can also toss the return envelopes into your recycle bag.
  3. Sort by type – medical in one pile, credit card bills in another. Utility bills and ongoing household expenses in another, etc.
  4. Sort each type file by creditor or sender. All PG&E together, all Chase cards together and all Aunt Susie’s letters together. Put all Chase collection letters (from agencies and lawyers) with the original Chase bills.
  5. If you have more than one account with a creditor (like two separate American Express card accounts) separate those accounts in different piles.
  6. Organize each creditor pile by date with the most recent on the top.
  7. Finally, place each stack into a file folder and label the folder with the creditor name and the last 4 digits of the account number. In my office we prefer that you do not use staples. If you bring in paper we will scan it and return it to you and staples only slow down the process.

Congratulations! Your bills are now organized and ready to work with whether you are looking at debt consolidation plans, a bankruptcy or just want to know how much you owe. For some tips on charting your financial future click here to read Cathy Moran’s article.

More Bankruptcy O’s:

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The California Northern Bankruptcy Court is the area or district that our firm covers. California has four bankruptcy court districts – California Central Bankruptcy Court, California Eastern Bankruptcy Court, California Northern Bankruptcy Court, and California Southern Bankruptcy Court. Each district is made up of different divisions. Each division has a different court location and different practices and procedures.

People sometimes ask me if I will go to a different district so I can take their case. This is something that I rarely do because of the additional time that I would have to put into handling the case. It is usually best for me to refer the person to a colleague that works in that district. Not only would I have substantial additional travel time but in most cases I would have to spend time finding out what the local rules require and what practices vary in that district.

Isn’t the Bankruptcy Law the Same in Every Court?

It’s true that the federal law is the same for all bankruptcy courts. But it’s equally true that each district has its own specific procedures. Not only that, but each division within a district has its own local rules and practices. California Northern Bankruptcy Court has an Oakland Division, a San Jose Division, a Santa Rosa Division, and a San Francisco Division. Each of these divisions has its own judge(s) and trustees and its own local practices and policies.

What Counties are in the California Northern Bankruptcy Court District?

California Northern Bankruptcy Court encompasses the following: Alameda and Contra Costa counties are in the Oakland Division. San Benito, Santa Clara, Santa Cruz, and Monterey counties are in the San Jose Division. Del Norte, Humboldt, Lake, Marin, Mendocino, Napa, and Sonoma counties are in the Santa Rosa Division. San Francisco and San Mateo counties are in the San Francisco Division.

If you are considering filing bankruptcy find out what division and district your prospective attorney is familiar with. It is generally best to choose one who has some experience in the court where you need to file.

Other California Divisions can be found at the United States Ninth Circuit Court Locator.

Additional N posts and a place to find bankruptcy attorneys in other areas:

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What is this “Means” Test I Have to Pass?

The means test is used by the courts to determine eligibility for Title 11 of the United States Code Chapter 7, or payments in Chapter 13 bankruptcy. It was designed to prevent debtors who have sufficient financial means to pay a portion of their debts from liquidating them entirely in a chapter 7 bankruptcy.

During the Great Depression, the test was used to screen applicants for such programs as Home Relief in the United States, and starting in the 1960s, for benefits such as those provided by the Food Stamp Program. In 2005, the United States bankruptcy laws changed by adding a means test to purportedly prevent wealthy debtors from filing for Chapter 7 Bankruptcy. This 2005 BAPCPA change is found in 11 U.S.C. § 707(b).

If you are in the military or have a majority of non-consumer debt you are exempt from the means test income guidelines. Non-consumer debts are mainly those incurred for business or profit purposes, tax debt and tort debt.

Is Your Income Less Than the Median?

Debtors whose income is below the state’s median income pass the means test. To check your median income you must first determine your household size. Gross wages, business income, pension, family support, unemployment, regular gifts and other income is included. Social security payments are not included.

The median California incomes as of March 2012 are:

1 person – $47,683

2 persons – $61,539

3 persons – $66,050

4 persons – $74,806

5 persons or more – Add $7,500 for each person in excess of 4.

If your income is below the median you go no farther with the form or the calculations. STOP you are done. You can file for chapter 7 and do not need to complete the rest of the form.

What If My Income is Over the Median?

In Marin County we often see the situation where the income exceeds the median but there is not enough left to pay the creditors. In this case the long form of the means tests must be completed. The long form factors in expenses like mortgage payments, payments for taxes, insurance, costs of education, healthcare costs and insurance costs. Most people who need help find that they pass the means test.

If you pass the means test it means that you can file a chapter 7 bankruptcy. Just because you can file under chapter 7 doesn’t mean it is the best chapter for you to file under. If you are trying to catch up with mortgage payments or have unsecured liens on your property a chapter 13 would likely benefit you more.

Please see the following for more M posts:

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What do you mean “lift the bankruptcy stay?”

The automatic stay is a major advantage to filing for Bankruptcy. After you file no one take any action to collect a debt, enforce a judgment, garnish your wages, take your property or continue with a lawsuit unless they lift the bankruptcy stay. There are some exceptions such as the requirement to keep paying child support.

Who lifts the bankruptcy stay?

A mortgage holder or automobile lender might want to lift the bankruptcy stay so they can take some action to pick up a car or foreclose on a mortgage. In order to lift the stay, a motion must be filed in court and heard by a judge. With this process you get the opportunity to convince the court that the creditor is wrongfully trying to take your property, or you aren’t really behind in your payments, or any other defense you may have to the motion to lift the stay.

Most often happens in a chapter 13 when payments are behind.

This most often happens in a Chapter 13 if you fall behind in your payments to a secured creditor. They want to repossess the automobile or foreclose on the home. If you have been making your payments it is hard for them to do anything.

What can you do?

You may be able to restructure your bankruptcy plan payments to catch up. You may be able to get extra time to pay. If your requests are reasonable a judge will grant them.

If you have received a motion to lift the bankruptcy stay, be sure and talk to your attorney about it. You have to respond to the motion and ask for a hearing or the creditor will get what they ask for.

You’ll want to look at your situation carefully and decide if a change in plan will work or if there really isn’t a workable option. It might be that you can’t afford to keep that property and should consider letting it go.

L is also for:

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K is for 401k

401k Plan – Can I file for bankruptcy if I have a 401k plan?

Certain accounts can’t be touched during a bankruptcy filing and the 401k is one of them. Under the bankruptcy code a 401k is not property of the estate and creditors have limited access to it.

It makes sense if you think about it. The federal government has set up bankruptcy as a way of helping people get back on their feet and recover from financial challenges. If it was required that people first use up all their retirement funds, these same people would likely require government assistance when they reach retirement age.

Warning If Only One Participant

An exception to retirement plans not included in the estate exists for those that have only one participant, such as single employee corporate plans, and some other plans originating in self-employment. These plans may be property of the estate and may be vulnerable to creditors unless subject to an exemption. Get good professional advice if this describes your retirement plan.

Be Careful of Borrowing Against a 401k

Outstanding 401k loans can present a problem in bankruptcy. Since they are not considered debts, they are not dischargeable. They are also not considered special circumstances that are deducted when calculating the long form means test.

In a Chapter 13, the 401k loan can be repaid as part of the plan.

If you are laid off or switch employers the entire loan balance becomes due and must be paid within 90 days to avoid a tax penalty. You can pay this balance with a credit card. If you do it right before filing bankruptcy you’ll have another problem, as the charge will almost certainly be challenged as abuse.

The warning is – do not use 401k funds to pay off dischargeable credit card debt.

Other Lawyers Playing the Bankruptcy Alphabet Game:

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