Friday, January 16, 2015

Top 10 Bankruptcy Pitfalls




YOU MUST READ AND UNDERSTAND THE BANKRUPTCY PETITION, AND NOTIFY ME OF ANY ERRORS OR OMISSIONS, BEFORE YOU SIGN IT, AND IT IS FILED.  FAILURE TO DO SO IS AN UNCONSIONABLE BREACH OF YOUR DUTIES AS A DEBTOR
1.     Do Not Borrow from Retirement Accounts.  Retirement funds are exempt when they are in the retirement account, but are not exempt once they are removed.  So, if you borrow $50K from your 401(k) and deposit the funds in your checking account before filing, you will lose the $50K to creditors, and have to pay back the 401(k) loan.  This is especially important in Snohomish county where you are more likely to have an adverse result than in either King or Pierce counties.

2.    Stop Using Credit (Including Payday Loans and Cash Advances).  There is a presumption in the Bankruptcy Code that you did not intend to repay if you take a cash advance within 70 days of filing bankruptcy or you use credit within 90 days of filing.  Therefore, you will have to pay that money back.  If you used credit more than 90 days prior to filing, creditors can still show that you did not intend to repay and object to the discharge of any particular debt.  So, do not charge when you lack the income to repay, and do not charge and then not make any payments.  Access to all credit will be terminated upon filing bankruptcy (you can't keep any credit cards), so prepare for how you are going to live without credit in advance.

3.     Stop Paying All General Unsecured Creditors if Your Debt to Income Ratio is 35% or Higher Unsecured creditors have no collateral to repossess such as a car or tires or a computer or television.  If you want to keep the collateral keep paying the secured creditor; if you don't then you can stop.  If you pay unsecured creditors more than $600 in the 90 days prior to filing, you will be required to pay back that amount, so that all unsecured creditors may share on a pro rata basis.  This is called a preference, because you are preferring one creditor over another in the same class of creditors (general unsecured).  Taxes, child/spousal support, and student loans are not in the same class as general unsecured creditors, so pay those obligations. Preferential payments may require conversion to Chapter 13 if the amount cannot be paid in a lump sum.

4.     Do Not Pay Back Family Members Prior to Filing (Pay Them After Discharge).  Family members such as spouses, parents, siblings, cousins, and adult children are insiders under the bankruptcy code.  Payments made to insiders a year or more before filing may be recovered by the Trustee.  This recovery is usually accomplished by the Debtor converting to Chapter 13, and waiving the statute of limitations on the Trustee suing the relative who received the money if you don't complete your Chapter 13 plan.

5.    Do Not Settle Debt Prior to Filing.  If you settle debt prior to filing bankruptcy you will owe tax on the amount of debt forgiven by the creditor.  This is called imputed income.  For example, if you owe $100K and the creditor settles for $10K, you will receive a 1099 which will increase your taxable income by $90K.  You received the right not to repay the $90K, which is imputed to you as taxable income.  The tax debt is not dischargeable in bankruptcy, even though the underlying debt would have been dischargeable.

WARNING REGARDING TAX IMPLICATIONS

         Consult your CPA regarding claiming exemptions to the general rule of tax liability regarding foreclosures. I am not a CPA and cannot give tax advice.  I try to learn enough about taxes to warn clients about questions they should ask their CPA.
          Below is a link to the IRS web site with answers to common questions about bankruptcy, foreclosure and other issues.
http://www.irs.gov/uac/The-%E2%80%9CWhat-Ifs%E2%80%9D-for-Struggling-Taxpayers


6.   Do Not Bank Where You Have Credit.   If you have a checking or savings account at the same bank where you have a mortgage, car loan, credit card, or signature loan, the the creditor can set off your account and take the payment due (without notice to you) if you don't make the payment.  If you have the funds in a bank where you don't have credit, the creditor would have to sue you first and obtain a Judgment before serving a Writ of Attachment in order to access the funds in your account.  BECU, for example, will disinvite you to be a member if you owe them money and file bankruptcy, so change banks immediately.  Close your Wells Fargo accounts and bank somewhere else regardless of whether you owe Wells Fargo any money because Wells Fargo has a policy of freezing accounts.

7.    Cancel All Automatic Payments (and Change Banks).  All automatic payments will be cancelled by creditors anyway as soon as you file.  You should cancel them and take control of which creditors you pay so that you avoid preferential payments and have the funds needed to file bankruptcy without the undue sacrifice associated with overpayment to creditors.  Any NSF charges will be listed as debts in your bankruptcy, so change banks in case the automatic payments are not stopped.

8.    Report All Assets - Do Not Sell or Transfer Assets.  Everything you own or may have an interest in is included in your bankruptcy.  You must list every bank account you have on your bankruptcy petition and the balance in each account on the day of filing (including joint accounts or accounts not in your name that contain your money), as well as every other asset of any kind, including potential claims such as those relating to personal injury cases, inheritance of someone who has died but has an estate that has not been fully administered, debts owed to you, patents, copyrights, oil and gas and mineral rights, interests in businesses and anything else you even suspect may have any value now or in the future.  If you don't list it on the petition, you can't claim it as exempt.  The asset never leaves your bankruptcy estate and is subject to the Trustee's claims on behalf of creditors in perpetuity.  You can also lose your discharge and be criminally prosecuted for failure to disclose assets.  Do not sell or transfer assets and fail to disclose the sale or transfer because the potential negative consequences are potentially even greater.  If you become entitled to receive, not actually receive, an inheritance within 180 days of filing bankruptcy, you are required to report it to me and I will report it to the Trustee.

9.     Verify that the Creditor has Perfected their Lien on your Car Before Filing if Purchased Within 6 months of Filing.  If you buy a car within 6 months of filing, (the closer to filing the purchase is made, the more important it is to verify), the creditor has 30 days to record notice of the lien with the Department of Licensing.  If the creditor fails to record notice of the lien, then the Trustee can avoid the lien, repossess the car and sell it for the benefit of creditors.  You will be out whatever you paid down on the car, and any payments you made, in addition to having to get another vehicle.  For example, if you buy a car with a $20K loan from Capital One Auto Finance and then file bankruptcy 3 weeks later, if Capital One Auto Finance files the notice of lien 5 weeks after you bought it (you have no control over the creditor's perfection of their lien), then the Trustee can take your car, and there isn't anything you can do about it.  Capital One Auto Finance will lose the right to share in the proceeds of the sale by filing an unsecured claim, and will lose $20K for failure to timely perfect the lien, so you would think that would be an incentive to timely file, but you would be wrong.  This is especially important in Snohomish county where you are more likely to have an adverse result than in either King or Pierce counties.

10.    Do Not Have an Unsecured Loan and a Secured Loan with the Same Creditor.  For example, if you have a car loan and a credit card with the same credit union then you have agreed to what is called cross-collateralization.  Credit Unions in particular will often give an interest rate break to encourage you to have multiple accounts.  It isn't worth it in the bankruptcy context. If you default on the credit card payment, your car can be repossessed even if you are current on the car payments.  If you have a car loan only with a creditor and no bank account or credit card, then the payment cannot be set off from your account as described above, and your car cannot be repossessed if you are current on the payments.

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