Kentucky Bankruptcy Law

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Things to be aware of if facing bankruptcy 5

For the next installment of my warnings of things to avoid pre-bankruptcy, I want to speak to a big temptation. Many people, by the time they make their way to me, have already exhausted not only their own resources to stay fiscally afloat, but also the resources of friends and family. So, these same people who were responsible enough to do all they could to pay their debts, feel beholden to their friends and family to pay them back. I understand that. I would feel the same way. However, this can be hurtful to those same friends and family.

To pay any single creditor more than $600.00 in the ninety (90) days preceding bankruptcy is a preference. The trustee in your bankruptcy has the right to pursue recovery of those payments. When the payments were made to a friend or family member (an insider), that 90 day time-frame gets extended out a LONG way. In fact, you are required to self-report any such transfers occurring in the last year prior to the bankruptcy. However, the bankruptcy code actually allows the trustee to use state law in determining a preference to an insider. That means that in Kentucky, the trustee could pursue transfers to insiders made in the five (5) years preceding bankruptcy.

Now, do not panic. The transfer would have to be pretty substantial for a trustee to want to go after one really old. The point, though, is that you are not really doing your friends or family a favor by trying to pay them prior to the bankruptcy. This is because the trustee could go yank those funds right back from them. Then neither of your are helped. Rest assured, after the bankruptcy is completely over, you can pay whomever you like. They just cannot force your to pay them.

October 23, 2013 Posted by | Bankruptcy, Chapter 13, Chapter 7, Planning, Pre-filing planning, Preference / Preferential payments | , , , , , , , , , , , , , | Leave a comment

Looking out for extended family can cost them in your bankruptcy

When faced with bankruptcy, people hate to turn away from family that have helped them. The natural and common thing to do is try and repay those family members instead of other debts or to protect family assets by giving them away. This very human reaction may be understandable, but under the law it is not forgivable. Such transfers can create real problems for yourself and for the family you were trying to help.

The bankruptcy code provides for a trustee over a Chapter 7 estate to go after assets transferred prior to the filing of a Chapter 7. These transfers can take the form of favorable repayment of one (or some) debts over others or in the form of a gift. A favorable repayment may constitute a “preference” and a gift may qualify as a “fraudulent conveyance (or transfer)”. When the person receiving the preferential payment or the gift is a family member, the bankruptcy code is especially tough. The trustee can go after preferences made up to a year prior to the filing of the bankruptcy if made to an “insider”. Family members are insiders by definition.

Trustees can go after fraudulent transfers (gifts) to insiders made two years prior to filing under the bankruptcy code. However, one cannot rely on that two year period because the bankruptcy code also has a “strong arm” provision that allows trustees to use state law to go after preferences and fraudulent transfers. In Kentucky preferences are treated the same, but the reach back period for fraudulent conveyances to insiders is five (5) years prior to the filing date.

Two situations recently came to me that point out the need for caution. In the first situation, a person borrowed from a close relative to put into a business. They intended to pay this relative back in a lump sum from a retirement account, but then it began looking like a Chapter 7 might be imminent. This would have created a double impact: first, exempt funds that would have ridden through the bankruptcy would have been converted to non-exempt funds and second, the trustee would have pulled that large lump sum payment back into the estate from the relative. From those reclaimed funds, the trustee would pay himself a percentage and the rest would have gone to unsecured creditors. This is a good example of a preferential payment within a year of bankruptcy to an insider. The retirement would be gone and the relative would remain largely unpaid (they would be treated the same as any other unsecured creditor and recieve cents on the dollar).

The second situation involved a person who had racked up considerable unsecured debt and had their personal residence secured to the hilt, but they owned several acres in another state free and clear of any lien. It was important to this person to retain the out of state land because it contained a family cemetary. They wanted to give the land to someone else to keep it in the family. Unfortunately, this would have been a fraudulent conveyance and the land would be taken and sold by the trustee with proceeds going to unsecured creditors. The cemetary itself would likely be protected and the family could still access it, but ownership of it and all the surrounding acreage would leave the family.

With a five (5) year reach back in Kentucky anyone would be hard pressed to plan for hard financial times well enough to preserve such an asset, but this example highlights the importance of sitting down with a bankruptcy practitioner who will help devise a comprehensive plan. In this scenario and with other factors beyond the limits of this posting (such as the age and health of the debtor), delaying bankruptcy by using this land as collateral to obtain enough funds to live on would be a wise alternative.

March 18, 2013 Posted by | Bankruptcy, Chapter 7, Discharge, Estate Planning, Exemptions, Planning, Pre-filing planning, Property (exempt | , , , , , | Leave a comment