Losing Assets in bankruptcy.
There are assets clients often lose in a bankruptcy filing. These assets include assets you transferred or sold and assets we forget. These assets also include assets you will own in the future and may not even know about. Assets are far more likely to be lost in a Chapter 7 bankruptcy than in any other Chapter. A high total monthly income may force into Chapter 13 under the bankruptcy code but it is the safer option if you think you may lose property.
Keeping assets in Chapter 13 v Chapter 7 bankruptcy
When you file bankruptcy, most people are either concentrating on trying to keep property or discharging debts. Sometimes there can be another purpose, such as stopping a foreclosure or managing student loans and tax debt.
You can keep property by using the state or federal exemptions that allow you to keep a certain amount of exempt property to have a fresh start. But you are not allowed to keep a 500,000 home without any mortgage. Both the debtor and the creditors will have to accept a tight budget. The bankruptcy judge believes the debtor is responsible for repaying to the best of his ability and does not need that Ferrari. It can be used to repay priority and unsecured creditors.
When you don’t have enough exemptions you can pay the Chapter 7 trustee or pay into a Chapter 13 plan to keep the property. You simply pay what the Chapter 7 would have paid to creditors. This means you get to deduct the costs of sale and often the trustee fee. This can be a savings if you avoid a Chapter 13.
Chapter 13 allows you to keep property better and avoid losing assets in bankruptcy.
Chapter 13 allows you to keep the property. If you have too much equity in a car or home, you can still keep the car or home in Chapter 13. But you may have increased your Chapter 13 payment a bit. Chapter 13 allows you to dismiss the case if losing property becomes a problem. Chapter 7 does not.
In a Chapter 7 bankruptcy, your income should be about average for your size family or just enough to pay necessary expenses. You are allowed to keep your essential property in a Chapter 7 bankruptcy within the exemption limits. But if you have too much equity, the assets are liquidated to repay creditors. For instance, you can keep 27,900 in equity for a home in 2022 for each person on the deed. You can’t keep 100,000 in equity with bankruptcy exemptions unless you live in a state like Texas or Florida, which has high homestead state exemptions.
Failing to list assets to the Bankruptcy Court and Trustee
Some assets are often lost because debtors either refuse to tell the court about these assets or debtors fail to think of them when they are preparing a petition. The bankruptcy court and trustees can reach back and claw back assets you gave away or exceed what you are allowed to keep. Your property includes joint assets if mom puts you on her deed, car, or checking account. Even if you didn’t know about mom putting you on the account or you have a winning lottery ticket.
You lose the property in Chapter 7 if you don’t list an asset and exempt it. Whether you failed to list it by accident or on purpose neither the Western District of Kentucky nor any other jurisdiction will be amused. If you have been domiciled your state less than two years you have to use the lower of that state or the prior state’s exemptions.
Failing to list a debt, especially priority and secured debts
You must list every debt of any kind in your bankruptcy petition, even if you want to pay a car loan and keep a motor vehicle. Retirement accounts have very high exemptions, and it is unusual to lose money in a retirement account. But as soon as you cash it out to pay a debt, you lose the bankruptcy exemption that protects it.
The failure to list debts, even if you don’t think you owe the lender or the debt is very old, is no excuse. You must list child support and alimony even if you cannot discharge the debt. By not listing all of your debt, assets, income, and expenses in your budget, your bankruptcy case can be forced into a Chapter 13 payment plan, or the case can be dismissed. You can lose property under the bankruptcy code even if you intended to pay creditors.
Assets and debts you failed to list and exempt causes losing assets in bankruptcy.
The bankruptcy court and trustees are always looking for assets to seize. They earn a fee on a sliding scale starting at 25% of anything they can take from you or other people, including your creditors. Neither the bankruptcy trustee nor creditors are your friend or buddy. They are in court to make sure:
1. The petition is accurate and complete,
2. You are making your best effort to repay and
3. To make the maximum profit they can from you.
If you fail to list an asset, you lose it. You have no right to use bankruptcy exemptions to keep it. Generally, if an asset is worth less than 600 dollars, the Chapter 7 bankruptcy trustee probably does not want it for practical reasons. If it were 500 in cash, a tax refund, or a checking account, a Chapter 7 trustee would probably take it if you cannot exempt it.
If a car is only worth 500 dollars, it would probably not be worth the Trustee’s time to collect and sell the property at an auction. The sales costs and any loan value make such property unprofitable. Chapter 7 trustees typically abandon small nonexempt assets with small values to the creditors. Personal property with a small estimated value usually have a bankruptcy exemption amount available.
Try to list all of your assets. If you don’t list and exempt it, you lose it.
Inheritance and Life Insurance commonly cause losing assets in bankruptcy court
A Trustee can seize assets from a life insurance policy or an inheritance. If someone dies or you become entitled to death benefits within 180 days of filing bankruptcy, the asset becomes part of what is available to repay creditors. How this works is that the debtor must turn over any non-exempt portion of their inheritance. This is found in § 11 USC 541 (a)(5)(A) of the bankruptcy code. The Chapter 7 bankruptcy trustee’s job is to sell it for unsecured creditors. The Chapter 13 trustee will apply it to the Chapter 13 plan.
Often the inheritance is more than enough to repay your debts at 100%. Of course, when you file bankruptcy, you may not be aware of this as an asset. We usually don’t expect the death of a family member. In Chapter 7, this is 180 days after discharge. In Chapter 13, this is also an asset until 180 days after discharge. Since Chapter 7 usually only lasts four months, it is less of a problem. In Chapter 13, it happens much more often because Chapter 13 typically lasts five years.
Chapter 7 bankruptcy and Business Assets
You only own your share of any property. But shared property is just as much yours as if you owned it by yourself. This becomes a problem for the Trustee if you own part of a company, such as a joint partnership. It is often impossible to sell the assets of a jointly owned company if the assets are shared with ten other people.
The corporation and its creditors would be harmed by selling off 10% of the company. How do you sell 10% of a car? Even the income requires the joint work of all the partners. If you are actively involved in the day-to-day operation of the business, the assets of that business are often reasonably safe. Shares of stock and dividends are not protected. If you solely own the company, probably none of the assets are safe.
Shared nonexempt property exemptions and assets
Bank accounts, real estate, and tax refunds are common joint assets that can be lost in bankruptcy. It is common to have a joint bank account with your mother. And it is easy for a trustee to take the non-exempt portion of a tax refund. This commonly happens when the husband files for bankruptcy, but the tax refund is a joint asset.
The Trustees in Indiana often take tax refunds because only one spouse filed. The property exemptions for Indiana tax refunds are split pro-rata between the spouses as an asset. If you jointly own half of a bank account, it is easy to take 50% of that asset. Joint bank accounts often exist with a child or parent you may be caring for. The property you own jointly with others is an asset of your bankruptcy estate. And even if you no longer own the property, it may still be lost if it was a fraudulent or preferential transfer. It does not matter whether you knew about your ownership or not.
Bankruptcy laws and Preferential Transfers
A fraudulent transfer or preferential transfer can easily happen without any fraudulent intent on your part. In a preferential transfer, a creditor only needs to get more than he would have gotten if Chapter 7 had been filed. If the creditor takes a lien on your home or car without giving you anything for that lien, it is a preferential transfer. It does not matter whether the creditor was given a lien on your property with a mortgage or whether the creditor filed a judicial lien or garnishment and took it without your permission.
11 USC 541 (a) (6) gives the Trustee the right to recover the nonexempt property. If you want to recover garnished assets that the Trustee abandons, you can also sue to get back garnished wages or bank accounts within the previous 90 days. However, if the amount is less than 600 dollars, you can not usually file a motion to get back amounts less than 600 dollars.
Fraudulent Transfers in federal court
A fraudulent transfer is when you sell or transfer property for less than what it is worth within two years before filing bankruptcy. Giving your son a car a year before filing bankruptcy is a typical example of a fraudulent transfer. If you have waited over two years, it is no longer a fraudulent transfer for bankruptcy purposes. But Kentucky has a state 5-year clawback period, often used for Medicaid purposes.
The Trustee has both the job and the right to get the return of that nonexempt property or its reasonable equivalent from the individual who did not pay the full value of that asset. You may have forgotten about it, but the Trustee often catches these transfers, which have a two-year clawback period.
§11 USC 548 is used when a debtor tries to hide or defraud creditors. With this goes the principle that if you do not list the asset in your schedules, you cannot exempt and keep it. You can also not exempt property which is not yours. So if you gave property away that you could have listed and exempted, you have lost the property without getting it back. Whether you intentionally or negligently did it, the result is the same. You lost it.
Anytime you did not get less than the “reasonably equivalent back while you were insolvent, it is a fraudulent transfer 11 USC 548(a)(1). It doesn’t matter if you sold it, gave it away, whether you voluntarily gave it away, or it was taken from you. It doesn’t matter if you gave it to your invalid mother or the church. The Chapter 7 bankruptcy trustee now gets to take it.
Lottery winnings, rent, and profit.
The bankruptcy estate includes the asset and what the asset is worth in the future. So the lottery ticket may only be worth a dollar today, but it may be worth 1,000,000 dollars in the future. The asset’s future value as a stream of income can belong to the Trustee. Ok, the stock may only be worth 20 dollars, and you may exempt the stock, but the future income stream from that stock, business, or rent often belongs to the Trustee. Usually, you can exempt this if you list the asset. All too often, people forget to list the lottery ticket.
11 USC 541 (a) (6) says the proceeds, rents, profits, and offspring of what you own are included in the bankruptcy estate. This has included tax deductions a business can declare in future years from a company. All of these items are the passive result of a company or investment. Future value does not include the income from your wages. Wages and accounts receivables that are owed to you are an asset. But your future earnings from your job are not an asset for your creditors or the Trustee after you file bankruptcy.
Divorce Property Settlements in a bankruptcy case
Child Support and Alimony are not assets for the Trustee unless you have somehow assigned these assets to some other entity. Generally, domestic support obligations are always safe. But your relationship with your ex-spouse is similar to a debtor and a creditor regarding a property settlement. That is why a property settlement can often be discharged in Chapter 13. I know you don’t expect to see that, but discharging property settlements does exist. Every district can have different rules, but it is an issue.
If you are getting property from a divorce property settlement, you can also lose that property to the Trustee. The 180-day rule found in § 11 USC 541 (a)(5)(A) also applies to the house or lump sum of cash you are getting. If you get the house as a payment of a domestic support obligation, then it is not the property of the estate the bankruptcy trustee can take. Your divorce court order needs to order it in payment of domestic support
If the home or $150,000 your ex is paying you is a property settlement, a creditor can take that from you. The Trustee is no different from a creditor with a judgment lien on all your property when you file bankruptcy. So, if a creditor can take your home because you got it from a property settlement, then the Trustee can also take it. Domestic support obligations are not attachable. Be careful how you draft your divorce settlement agreement. Alimony is taxable income. Child support is not. And the § 11 USC 541 (a)(b)(5) 180-day rule applies to any property settlement if you get it within 180 days. Make sure you don’t get it or become entitled to it until next year.
Should bankruptcy attorneys evaluate your case or a paralegal
Bankruptcy requires planning and being truthful to your bankruptcy lawyer. If you leave out facts, the attorney must know you may suffer from losing property. Bankruptcy requires a complete and accurate petition which an attorney drafts with you spending hours drafting it.
A bankruptcy case is rarely planned if you have a paralegal prepare it. The attorney is the one with the knowledge of thousands of cases and years of law school. Something you don’t get if you are handed off to a secretary instead of a bankruptcy attorney. This is often the cause of losing property that exemptions protect or should have protected. You pay for bankruptcy protection to avoid the personal liability of outstanding debt. You didn’t intend to pay for trouble because federal bankruptcy law was not properly analyzed. Never lose the bankruptcy discharge simply because you failed to list property. And you definitely don’t want to lose property because you used the wrong exemptions.
Contact Us with your sensitive or confidential information
In our office, you sit with me for two hours to discuss your bankruptcy petition. situation and goals. You later spend about 2 hours preparing the Chapter 7 petition to ensure you do not lose property and discharge the maximum amount of debt. Deserving debtors spend about eight to ten hours of their time and about 1500 to 2000 dollars completing their Chapter 7 bankruptcy case. The reward is the discharge of thousands or millions of dollars and keeping the essential property in your bankruptcy case.
However, people who try to keep assets by being creative and giving away or hiding assets will often lose them. Never hire a bankruptcy lawyer because they have great attorney advertising or give out cookies. Instead, use someone who takes the time to get it right so you maximize the property you keep. Be sure to call our office. We will exempt what can be exempted and find other ways for you to keep the property correctly.