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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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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J is for Joint Filing

Is Joint Bankruptcy Filing For Us?

Couples often ask me if they should file separate bankruptcy petitions. “We have our own debts and don’t think we should file together,“ they say.

California is a community property state

Those debts the couples think are separate usually are not. Unless the debt was incurred prior to the marriage it is a community debt even if it is only in one name. In addition, if there is not enough separate property to pay separate debts the community assets can be reached by creditors.

Filing Jointly

If both spouses need the protection of the bankruptcy court it is usually easier, more efficient and more economical to file jointly. A joint filing will only require one filing fee. Separate filings will require two filings fees, one for each party. All community and separate assets and liabilities are listed whether filing jointly or separately. If the couple files separately, they need to list everything anyway so it may make sense to file one time and list everything together.

Separate Households

If a couple has been separated for a while and set up two distinct households it might be easier to file separately. Sometimes the spouses cannot communicate well and one spouse doesn’t have all the information needed on the other spouse’s income and expenses. In that case it would be better to file an individual bankruptcy.

Nothing in the law requires a couple to file jointly. The decision should depend on the specific circumstances of the couple involved.

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I is for Income

What income do I need to disclose in my bankruptcy?

All of it gets listed one way or another. Your wages, commissions, bonuses, regular contributions to the household by a family member or housemate, retirement and pension income, workers compensation and unemployment. Loans don’t count and one-time contributions also don’t count.

Means Test Income

For purposes of the means test, the U.S. Bankruptcy Code defines current monthly income as including: “any amount paid by any entity other than the debtor (or in a joint case the debtor and the debtor’s spouse), on a regular basis for the household expenses of the debtor or the debtor’s dependents (and in a joint case the debtor’s spouse if not otherwise a dependent)…” Benefits received under the Social Security Act, payments to victims of war crimes or crimes against humanity on account of their status as victims of such crimes, and payments to victims of international terrorism or domestic terrorism on account of their status as victims of such terrorism are excluded from the means test.

The means test looks back at the past six months on income as defined above. If you file a bankruptcy in January, the past six-month (or look back) period is July through December. It is this six-month period that will determine what your average annual income is. You must compare your average annual income based on the past six-month period to the median average for your state to see if you qualify to file a Chapter 7 bankruptcy. If your income is too high to file a Chapter 7 you may still qualify to file a Chapter 13.

Income on Schedules and the Statement of Financial Affairs (SOFA)

There is a Schedule I for Income where you list your monthly income including Social Security payments and other income that might have been excluded form the means test look back income. This schedule will be compared with your expenses that are listed on another schedule. One of the bankruptcy complexities is that income and financial information is listed in more than one way within the same bankruptcy case.

There is also a question on the SOFA that asks for the past several years of income broken down by wages and other types of income. Your answers to these questions can come form your income tax returns.

For another slant see Jay Fleischman’s I is for Income. Also see Cathy Moran’s I is for IRS and Christopher McAvoy, I is for Income Tax Refunds.

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H is for Home Owner's Association Dues

What happens to my homeowner’s association (HOA) dues if I file for bankruptcy?

It depends. If you owe HOA dues from before you filed, they are discharged in the bankruptcy. If you don’t pay the HOA after you file, those dues will not be discharged.

Where it gets confusing for people is when the property is foreclosed. A foreclosure may take many months to complete. Until that foreclosure is completed and title is transferred the dues continue to accrue and all the dues that accumulated after the date of filing the bankruptcy petition remain due and payable by the debtor under the U.S. Bankruptcy Code.

If you are living in the condo until the foreclosure process is completed, you could pay the HOA dues each month and avoid the problem entirely.

If you have surrendered the property in the bankruptcy proceeding, you likely aren’t paying the HOA dues because you have to pay rent somewhere to live.

If you haven’t paid the dues during the bankruptcy will it be a problem for you?

It may not be. This situation often resolves itself in the debtor’s favor because the lender has to clear the title before selling the property. Once the lender pays the dues to clear the title the debt no longer exists. Since the debt claim is based on pre-bankruptcy agreements, which have been discharged, the lender may conclude it has no recourse against the debtor. This means they may not come after you for the HOA dues even though technically you may still owe a portion of them.

For more Bankruptcy H’s see:

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