WHAT NOT TO DO WHEN CONSIDERING BANKRUPTCY
Contact the law firm of Steven P. Taylor, P.C. in the Indianapolis Bankruptcy Office at (317) 271-1111 or in the Kokomo Bankruptcy Office at (765) 868-0807 for a free consultation about how to properly prepare for bankruptcy. Call today to determine what your options are when filing for bankruptcy throughout Central Indiana.
Bankruptcy Pre-filing Information Center
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Avoid Preferential Payments to Insiders in Indiana
If you are considering filing for bankruptcy in Indiana, it is important that you do not repay friends, family members or business associates for debts owed to them. These types of people are considered “insiders.” Any payments made to them can be recovered by the bankruptcy trustee if the payments were made within one year prior to the filing of the bankruptcy petition, but only if the total repaid during the one year period exceeded $600.
According to 11 U.S.C. § 547(b) of the Bankruptcy Code, a preferential payment is defined as:
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Payment on a debt;
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To or for the benefit of a creditor;
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That was made while the debtor was insolvent;
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To a non-insider creditor within 90 days of filing the petition for bankruptcy; or
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To an insider creditor within one year of filing the petition for bankruptcy;
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That allows the creditor to receive more than it would otherwise receive in a Chapter 7 case.
The goal of bankruptcy is to treat all unsecured creditors fairly. Payments made to insiders that are also unsecured creditors, within one year of filing of the bankruptcy petition, would be unfair and are considered preferential. If an individual does make a payment to a family member, friend or business associate, within one year prior to the bankruptcy filing, the bankruptcy trustee will demand a return of the money from the insider who received the payment. If the insider refuses to return the payments to the trustee, the trustee can sue the recipient in bankruptcy court for return of the money to the bankruptcy estate.
Additionally, in Chapter 7 bankruptcy proceedings, a debtor can repay insiders after the bankruptcy petition has been filed. However, this repayment option is only available in Chapter 7 bankruptcy proceedings. In Chapter 13 bankruptcy proceedings, insiders are paid at the same time as other unsecured creditors through the Chapter 13 plan.
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Avoid Additional Debts When Filing for Bankruptcy in Indiana
It is also important to remember when filing for bankruptcy in Indiana to refrain from incurring any additional debt in the time period leading up to the filing. This means:
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Do not use existing credit cards;
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Do not apply for new credit cards;
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Do not take out new loans;
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Do not draw from home equity lines of credit or other types of credit lines; and
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Do not take additional equity out of your home.
Under certain circumstances, it may be advisable to obtain financing to purchase a vehicle prior to filing for bankruptcy. However, consult with a bankruptcy attorney before doing so. Debtors who incur additional debt in the period leading up to the bankruptcy filing, or who incur excessive credit card debt with no intention of repaying it, can face a denial of a bankruptcy discharge for bad faith, according to § 707 of the Bankruptcy Code. Further, according to the Bankruptcy Code, cash advances and luxury purchases may be presumed to be non-dischargeable under both Chapter 7 and Chapter 13 bankruptcy proceedings. The following cash advances and luxury purchases are deemed to be non-dischargeable under 11 U.S.C. § 523(a)(2)(C):
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Luxury items or services totaling more than $600 that is owed to a single creditor, and purchased in the 90 days prior to the bankruptcy filing, and/or
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Cash advances totaling $750 or more under an extension of consumer credit or open end credit plan, and obtained in the 70 days prior to the bankruptcy filing.
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Asset Transfers Prior to Indiana Bankruptcy Proceedings
Transferring assets prior to filing for bankruptcy can have detrimental consequences:
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Denial of Discharge - A debtor can be denied a discharge in a Chapter 7 bankruptcy if they transferred or concealed assets within one year before the date of the filing of the bankruptcy petition.
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In Indiana, a bankruptcy trustee can recover fraudulent transfers of assets made within the four year period prior to the filing of the bankruptcy.
A fraudulent transfer is defined as:
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A transfer of an asset made with actual intent to hinder, delay, or defraud a creditor; or
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A transfer of an asset where the debtor received less than fair value in exchange for the asset and the debtor was insolvent on the date of the transfer or became insolvent as a result of the transfer.
A common fact pattern is when an elderly debtor transfers his/her entire or partial interest in real estate to a family member and does not receive any payment in return. It is important to remember that it is not necessary that the transfer be made with intent to defraud creditors. In fact, the transfer is likely to be for estate planning purposes. However, in the bankruptcy context, a bankruptcy trustee need only show that the transfer was made for less than fair value within the six year period preceding the bankruptcy filing. Under these circumstances, a Chapter 7 trustee can bring an action against the recipient of the property to recover the property for the benefit of the debtor’s creditors. Of critical importance is that once an asset is transferred, the debtor can no longer claim an exemption in the property transferred. For instance, the homestead exemption in Indiana is $19,300.00. This means that a debtor can file a Chapter 7 bankruptcy and keep their home if the equity in their interest in the home does not exceed $19,300.00 (if the house is jointly owned, the equity can be up to $38,600). For example, let’s say a house is owned by elderly debtor. If ownership of the house was transferred from the debtor to his son to avoid probate, and the elderly debtor then files for bankruptcy, the trustee could set aside the transfer, sell the house, and use the proceeds to pay the elderly debtor’s creditors. This is assuming the elderly debtor files for bankruptcy within four years of the transfer. Again, the reason for the transfer is not important. If the debtor did not receive fair value for his share of the house, and he was insolvent at the time of the transfer (or the transfer made him insolvent), then it is considered a fraudulent transfer.
The same principles are true for any asset, including motor vehicles, bank accounts, jewelry, or other personal property. Keep in mind that “removing your name” from a joint bank account or investment account is generally considered a transfer of one half of the value of the account. As such, a bankruptcy trustee can recover the amount transferred.
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Tell the Truth Throughout the Indiana Bankruptcy Process
When filing for bankruptcy in Indiana, it is most important to remember to tell the truth throughout your bankruptcy proceeding. First, you must be honest with your attorney. Your attorney cannot properly advise you unless you are honest and disclose all information. Furthermore, lying under oath on your bankruptcy petition, or at the meeting with the bankruptcy trustee is a federal offense. This can lead not only to a denial of a bankruptcy discharge, but also to criminal prosecution. It is imperative to be completely honest and fully disclose all relevant information. You must disclose all assets, including all jewelry (including engagement rings), consumer goods and electronics, motor vehicles, pension and retirement funds, and financial accounts.
A common issue is that of “off the books” income. If you are working and earning income, or have earned income in the two years preceding the bankruptcy filing, it must be disclosed on your bankruptcy petition. This is true regardless of whether you reported the income on your tax returns or whether your employer withholds payroll taxes from your pay.
If you are paid commissions, you must disclose all sales for which you have a commission pending. Pending sales commissions are considered an asset. The debtor is able to claim the majority of the commission as exempt. Or, it might be prudent to delay a bankruptcy filing until after the commissions are received. This will allow the debtor to receive the money and use it for necessary expenses prior to the bankruptcy filing.
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Steven P. Taylor, P.C. | Kokomo and Indianapolis Bankruptcy Attorney Explains What Not to Do in Bankruptcy Proceedings
Contact the law firm of Steven P. Taylor, P.C. today for a free consultation about what not to do when considering bankruptcy throughout Central Indiana. Steven P. Taylor is an experienced Indiana bankruptcy attorney who will advise you on the proper procedures to follow in order to achieve a favorable outcome in your bankruptcy proceeding. Call (317) 271-1111 for a free consultation about how to prepare for bankruptcy.
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