Filing Bankruptcy – The Smart Move? – Two

Picking up from last week picking apart 

Steve Rhode, though written by Rick Abelmann

here Personal Finance Syndication Network.

This blog post is dedicated to tearing apart this:

Don’t File If You Are About To Receive A Large Sum
Perhaps this is another no-brainer, but you should not file for bankruptcy if you are about to receive a large sum of money that will allow you to pay your debts in all or in part. Bankruptcy can be helpful in many cases, but if you can resolve your financial situation without filing, that is probably preferable. This money may be seized by a court representative and used to pay your debts, also, when you might have been able to reach another arrangement with your creditors.

The primary factor in many of these cases is time. Many jurisdictions have a specific time period, usually 70 to 90 days, before filing, during which you should not make any major changes or transactions. However, it can be dangerous to think you can out maneuver the court and find sneaky ways to retain your assets. Being honest and upfront is the most likely way to reach a positive outcome. In any case, a good bankruptcy lawyer can be an invaluable resource and guide when deciding when and how to file for bankruptcy.

Court Representative?

Ain’t no court representative.

There is a trustee appointed in all Chapter 7 cases, with fiduciary duties to creditors.  Her job is to get assets that are not exempt and reduce them to cash for the benefit of creditors.

They are NOT government employees.  They get $60 out of the filing fee, plus a percentage of assets that they do find and reduce to cash.

They report to the court, but do not represent it.

In Detroit, the Eastern District of Michigan bankruptcy Court, trustees are randomly selected from the approved panel.  One is a CPA, and the rest are private attorneys like me.

Now, creditors can elect a different trustee, but that rarely happens.

Consult an expert attorney, it depends what the lump sum money is for, there may ways to spend and /or exempt all or part of it.

Specific Time Period?

This is so bizarre.  There are no 70 day time periods.

Bankruptcy law is federal, so, it is the same in each jurisdiction, except that state exemptions for property may be used.

That has nothing to do with transactions 90 days before filing bankruptcy.

The Bankruptcy Code presumes that you are insolvent for the 90 days before you filed.

So, if you are paying what you have left to the creditors you like, the trustee can go after those creditors and get those funds back, IF the payments exceed a certain amount.

The policy is, if you do not have enough to pay all the creditors, those funds should be distributed according the the Bankruptcy Code, not according to your whims.

On the other hand, borrowing money right before filing looks like a fraud on the creditor, and your discharge might be denied as to those debts.

The 90 day timeline is not the only provision.

Discharge can be denied as to any debt, no matter how old, if the creditor proves fraud by you in obtaining the credit.

And, the trustee has the powers of a judgment creditor under state law, which usually allows her to go back up to 6 years for payments or gifts or transfers made while you were actually insolvent.

There is no presumption of insolvency more than 90 days pre-filing, but it can be proved by looking at your assets and liabilities.

A little technical this week.

Oh, well.

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