A temptation that many people have when facing a bankruptcy is hiding assets. Often this arises from the mistaken notion that a debtor cannot get relief from debt unless they give up most of what they own. The bankruptcy code is not intended to be a punitive mechanism to harass people who do not pay their debt; it is intended to be a tool to give people a fresh start when they cannot reasonably cover all their debts. As part of this “fresh start’ intent, the federal bankruptcy exemptions are fairly generous. Some state law exemptions are more generous, but most are far less expansive.
One must first determine if their state law allows a debtor to utilize the federal exemptions. Kentucky does allow a debtor to opt for either the state exemption or federal exemptions. I have only found two cases where the Kentucky state exemptions were more favorable than the federal ones: 1) a case where a joint-bankruptcy was filed but one of the debtors passed away while the bankruptcy was pending, and 2) a case where the debtor was due a substantial worker’s compensation package. In each of those circumstances, the state exemptions were 100% of those assets being exempt where the federal ones were limited to “reasonably necessary”.
In all my other bankruptcies, the federal exemptions were the best choice. And, in nearly all consumer Chapter 7 bankruptcies, the federal exemptions will allow debtors to keep all their property. Since most debtors have enough exemption to keep all their properties, then there is no reason to try to hide those same assets. The attempt to hide assets, creates a real risk that could sabotage the entire bankruptcy and lead to the trustee giving tremendous scrutiny to your whole situation. It can also lead to loss of the relief of a discharge of debt.
As a follow-up to my last warning post where I talked about preferential payments including to insiders (friends and family members). I ended that post saying that after your bankruptcy is completed (discharge order, case closed) then you can repay anyone you like. This post is a caveat to that statement. Do not promise a creditor, whether friend or foe, that you will repay them afterwards. Simply let it be a nice surprise. T
You see, if you end up not paying them in full after the bankruptcy is over, your promise to pay could give them a legal argument to try to overcome the discharge of the debt. Basically, they would say that they relied upon your promise to their detriment and thus you defrauded them. This could lead to that particular debt suddenly becoming non-discharged. This is an unlikely eventuality, but attorneys deal with such things all the time. So, it is best just to stay silent and pay if you can.
Often, when approaching a Chapter 13, a legitimate concern that the potential debtor faces is having reliable transportation during the Chapter 13. The debtor may have fallen behind and had a car repossessed just prior to the bankruptcy filing. Or, more commonly, they are driving a junker of a car that is on its last legs (or wheels). Considering that most Chapter 13 bankruptcies are for five years (some people qualify for a three-year Chapter 13), having a junker car at the start is problematic.
First, it is very hard to predict how much one will have to expend to keep a junker car running for five years. Second, although debtors can apply to the court to incur additional debt during a Chapter 13, it is a tad more complicated to buy a car during the Chapter 13. So, it is entirely legitimate planning to buy a car prior to filing the Chapter 13. If there is sufficient disposable income, buying a dependable car before a Chapter 13 can direct some of that income away from paying unsecured debts towards paying for a legitimate need of reliable transportation. After all, transportation allows for employment and having regular income is necessary for a Chapter 13.
If, after talking to your lawyer about it prior to Chapter 13, you decide to buy a car then there are some things to be careful about. Foremost, you want to buy a car that is reasonable. Forget the Rolls Royce or Jaguar and look for the Corolla or Focus. In other words, do not get a luxury vehicle but get one that is functional. Now, it does not have to literally be a Corolla or a Focus, but the idea is to minimize fuel and repair costs while having enough car to meet your families needs.
Second, you need to be aware of the timing of the purchase. Under 11 USC Sect. 546(c)(1), the seller of goods appears to be allowed to have a right to reclaim the car within 45 days (or 20 days of the petition date if within that 45 days). There appear to be no cases in the Sixth Circuit addressing this issue, but it has come up elsewhere. In one case from Alabama I reviewed, the seller of the car claimed 546(c)(1) gave them the right to take the car back and moved the court to lift the stay to do so. Ultimately the court ruled in favor of the debtor because they found no exception for reclamation in the automatic stay of bankruptcy for the seller, but who wants to go through the hassle of unnecessary litigation. So, if possible, it is best to make the purchase 45 days prior to filing the bankruptcy.
The National Association of Consumer Bankruptcy Attorneys (NACBA) of whom I am a member has provided a great resource for folks struggling with debt and yet are trying to avoid bankruptcy. Here is an excerpt from the document attached here NACBA debt settlement trap consumer alert:
“Already struggling with home foreclosures, harsh bank and credit card fees, and other major financial challenges, America’s most deeply indebted consumers are now falling victim to a major new threat: so-called “debt settlement” schemes that promise to make clients “debt free” in a relatively short period of time. Unfortunately, most consumers who pursue debt settlement services find themselves facing not relief but even steeper financial losses.
Even the industry acknowledges – though not in its ever-present radio and online advertising–that debt settlement schemes fail to work for about two-thirds of clients. Federal and state officials put the debt-settlement success rate even lower – at about one in 10 cases – meaning that the vast majority of unwary and uninformed consumers end up with more red ink, not the promised debt-free outcome.”
I can tell you that a large percentage of my clients come in after trying a debt settlement service only to have thrown away scarce money. So, I recommend you read this entire article before engaging a debt settlement center. There is only one reputable debt settlement center that I am aware of and they have an office here in Lexington, Ky.
My prior post gave some tips for dealing with purchase money security interests, but this one today goes a totally different direction. We leave behind bankruptcy code section 522 and turn to 11 USC Sect. 523(a)(2)(A)-(C). These provisions all boil down to the non-discharge of fraudulent debts. Automatically we think of the person who goes on a spending spree for Christmas knowing they would be filing bankruptcy early in the new year. Definitely, they are running a risk here, but the reach of this provision is much further than that and so you will want to take a closer look.
That last provision, 523(a)(2)(C), gives some specific circumstances that constitute fraud and they have NO intent element. If you used a single credit card to buy Christmas gifts aggregating more that $500.00 in the 90 days before filing, you are presumed to have incurred that debt fraudulently. If you switched up and ran up more than $500 each on three different cards for Christmas gifts 90 days before filing bankruptcy, well all three of those debts are presumed to be non-discharged due to fraud. Furthermore, if you took out cash advances aggregating more than$750 from a single creditor in the 70 days prior to filing, that is also presumed to be fraudulent.
These debts are not automatically excluded from discharge, but the creditor has the right to object to their discharge. If the bare facts explained above are present, then the burden becomes yours to prove there was no fraud. Since intent is not part of the equation, this would be a hard thing to do.
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