Archive for August, 2012

Bankruptcy Discharge as Preference Defense

Wednesday, August 15th, 2012
article from Law Library

A preference is when a bankruptcy trustee or debtor in possession tries to recover pre-bankruptcy debt payments to certain creditors. There are various defenses available to such creditors in Section 547 of the Bankruptcy Code. However, what about the scenario when a small business files bankruptcy and the trustee seeks to recover pre-bankruptcy debt payments to officers? An experienced attorney will always examine a small business bankruptcy filing for such transfers and assess exposure. However, what if the owner, because of personal guarantees or other debt problems, decides to file bankruptcy as well? Can the owner’s own bankruptcy discharge prevent a trustee from recovering preference money from him?

In short, the answer is, yes. Although it is not listed among the available preference defenses in Section 547, a bankruptcy discharge will trump the trustee’s right to recover a preference as long as the trustee’s right, which would arise on the business’ bankruptcy petition date, preceded the individual’s bankruptcy petition date. Once awarded, the business owner’s discharge would be a permanent injunction against the collection of any preferential debt repayment. There is a caveat: if the the trustee can successfully content that the debt repayment was fraudulent or in breach of a fiduciary duty, he would have separate groups to seek a nondischargeability ruling with respect to the preference, but after canvassing the attorneys who write for the Bankruptcy Law Network, it seems that none have encountered a problem with this.

So, what’s the bottom line? A business owner planning to file personal bankruptcy and dissolve his company can probably repay any valid debts he is owed without significant danger, even if the business itself files bankruptcy (as long as the business files first).

Carolyn Secor is a Clearwater bankruptcy attorney and Clearwater foreclosure attorney serving Palm Harbor, New Port Richey, Oldsmar, Tarpon Springs, Seminole, St. Petersburg and the Tampa Bay area.

If you would like more information on our practice, please consult our website at:
or call (727) 254-1704.

How To Avoid Bankruptcy (Not)!

Wednesday, August 1st, 2012

Article from Bankruptcy Law Network

by Eugene S. Melchionne

It has been said that, “if you fail to prepare, you are preparing to fail“. (Ben Franklin) When anyone is first faced with any sort of financial problem, there are certain steps that most people (including “financial planners”) will recommend that you take. Here’s a short list of some of (mis-)steps can land you into trouble. This is not the way to avoid bankruptcy. In fact bankruptcy may not be such a bad choice at all, given the options.

1. Borrow funds from your 401K retirement plan. Somewhere the idea got started that if you are really in trouble, you can just take the money out of your retirement savings and then pay it back. (Oh yeah, the IRS says it’s OK.) The concept is that since you put the money there, you can borrow it and then pay it back over time with interest. Since you are only paying yourself back, it’s better than paying creditors. The real problem with this is that you are only trading one debt for another and if anything happens to your income, you will not be able to pay it back and now you have created a tax problem. That “borrowed” money becomes regular income and you have to pay taxes on your debt. But most importantly, you now have nothing saved up for retirement.

2. Refinance the house, take out the equity, and use it to pay bills. Luckily, the Great Recession has slowed this substantially and only sterling credit will get you a re-finance. Your house is not a piggy bank. The original idea of a mortgage was to allow low payments in order to buy a home. This is where you live and your mortgage is not rent. It is meant to pay off the loan so at the end of the loan, you own your home.

3. Raise you deductions on your paycheck so your employer withholds less from your pay so you have more take-home income every week. The IRS frowns on this. But worse yet, while you may be generating money to pay off your debt, you are exposing yourself to a tax claim at the end of the year. Given a choice of who I want to owe money to, it would not be the IRS.

4. Borrow from friends or relatives. So your brother is somewhat successful and has cash in the bank or worse yet, access to a credit line that you can use to pay your bills. Some call this “credit lending” where one person agrees to lend their credit so you can borrow money, but I call it the Vampire Effect. You are sucking the financial life out of others around you.

5. Engaging a credit counseling company online who promises to get you out of debt for little or no money. There are strict licensing guidelines for legitimate credit counseling agencies, but the airwaves and the internet are filled with questionable companies who will charge up large up front fees, take your money and disappear in the night leaving you with nothing but even bills than what you started with.

You can see why these will cause problems, but they are even larger if you are ultimately left with no choice but to file bankruptcy. Repayment of 401K loans are not a legitimate expense when calculating the means test numbers in a Chapter 7 case. That means you could be forced into a Chapter repayment plan, possibly for five years or worse yet, forced out of bankruptcy altogether. Most states and the federal government recognize an exemption for home equity meaning your home would not be at risk in a bankruptcy case, but if you have spent that equity, you must pay that mortgage even after bankruptcy or you could lose your home. It goes without saying that the IRS get preferential treatment even in bankruptcy cases and your tax problems will likely survive a bankruptcy. Repayments to friends and family are recoverable in a bankruptcy so the “friendly” loans paid within the year before a bankruptcy get unpaid. And finally, once a crook disappears with your money, it is near to impossible to recover it.

If you are experiencing financial problems or you can see it coming down the road, it is always best to get proper qualified information before you do anything. Even if you don’t plan on filing for bankruptcy, it doesn’t hurt to speak to a good bankruptcy attorney to make sure you see the situation properly and aren’t going to cause yourself any issues if things later go wrong.

Carolyn Secor is a Clearwater bankruptcy attorney and Clearwater foreclosure attorney serving Palm Harbor, New Port Richey, Oldsmar, Tarpon Springs, Seminole, St. Petersburg and the Tampa Bay area.

If you would like more information on our practice, please consult our website at:
or call (727) 254-1704.

Can I keep a credit card out of my bankruptcy?

Wednesday, August 1st, 2012
Bankruptcy news article by Chip Parker

The Bankruptcy Code requires a debtor to list all creditors in his bankruptcy schedules. However, a “creditor” is typically defined as someone to whom the debtor owes money. Specifically, 11 U.S.C. § 101(10)(a) defines a creditor as an “entity that has a claim against the debtor that arose at the time of or before the order for relief concerning the debtor.”

So, if the debtor has a credit card with a zero balance, the issuer of that card IS NOT A CREDITOR, and therefore, the debtor need not disclose his bankruptcy to that credit card company. BUT, that’s not the end of the story.

Card issuers write very one-sided credit card agreements that seem to get modified all the time. The Terms and Conditions always includes the following language:

Default – You and  your account will be in default of this Agreement if: . . . you become insolvent, assign any property to your creditors, or go into bankruptcy or receivership . . .

Cancellation of your Account – We may cancel your Account or suspend your ability to use the Account at any time, with or without any specific reason and with or without prior notice to you as permissible by applicable law.

So, even if a debtor has a zero balance credit card, the issuer has the absolute right to cancel it, but how does the credit card issuer know the debtor filed bankruptcy if the debtor does not give the issuer notice of the bankruptcy?

Credit card companies use sophisticated systems, like Automated Access to Court Electronic Records, to provide virtually instant data of new bankruptcy filers. They compare multiple pieces of debtor information with their account holder databases. If enough pieces of a debtor’s data match an active account, the credit card issuer assumes a match.

Once the credit card company has a match, does it always close the credit account? I honestly don’t know, but I do know that  debtors often use zero balance credit cards after filing. Maybe the card company is making the decision to keep the account open or maybe they failed to make a match. In either case, it is important to know that, despite not listing a zero balance credit card in the bankruptcy schedules, the credit card can get cancelled.

Carolyn Secor is a Clearwater Bankruptcy Attorney and Clearwater foreclosure attorney serving Palm Harbor, New Port Richey, Oldsmar, Tarpon Springs, Seminole, St. Petersburg and the Tampa Bay area.

If you would like more information on our practice, please consult our website at:
or call (727) 254-1704