Previous articles from Leiden & Leiden have addressed the importance of accurate disclosure of financial information in the process of filing for bankruptcy. This is necessary because a fundamental component of the bankruptcy process is a thorough disclosure of all of the debtor’s assets and income. However, simply disclosing what you presently own, and what you earn, may not be sufficient to receive the best possible benefit from a bankruptcy filing. It is important to not only identify property that you currently own, but also property that has been sold, transferred or returned in the years leading up to a bankruptcy filing. Likewise, the mere disclosure of income and monthly expenses alone – without identifying creditors to whom debts have been repaid in the months leading up to bankruptcy – could prevent the receipt of a bankruptcy discharge. Either type of non-disclosure could lead to adverse consequences for both the debtor and those to whom the debtor’s funds were paid, or property transferred.
In the process of a bankruptcy consultation, a potential debtor will usually be asked if they have sold, given away or transferred any property within the two years prior to filing bankruptcy. Such information must be provided as part of a bankruptcy filing to make sure that a debtor has not consciously diverted property in order to shield it from his/her creditors or the bankruptcy court. A transfer may be voluntary, such as the sale of a home or trade in of a paid-off vehicle. Likewise, a transfer may be involuntary, such as the repossession of a vehicle, or transfer of property pursuant to a domestic relations case. Regardless of how the transfer is achieved, your bankruptcy attorney will need to know the details regarding the transfer, including the date of the transfer, the person or entity to whom the property was transferred, and any payment or consideration received in exchange for the transfer. One of the goals of a Chapter 7 bankruptcy trustee is to liquidate property for the benefit of creditors, so there is always a concern that a debtor may have taken steps to shift property ownership to a third party to shield it from the trustee. Many debtors are unaware that the bankruptcy trustee can set aside a transfer in which the debtor did not receive reasonably equivalent value, or which appears to be done with the intent of evading creditors. One of the most common grounds for the federal charge of bankruptcy fraud is that debtors have sold or transferred property to family members or business partners with the intent of recovering the property once their bankruptcy proceedings have concluded. As a result, it is of the utmost importance that you be completely candid with your bankruptcy attorney when discussing such transfers.
Another cornerstone of the bankruptcy process (with certain exceptions beyond the scope of this article) is the equal treatment of creditors. A common issue that arises in a bankruptcy case is the payment of debts in the time period leading up to bankruptcy. For instance, the repayment of loans to family members within a year prior to the filing of a bankruptcy case is considered a preferential payment, which the bankruptcy trustee may recover. There is no requirement that the loan that is being repaid has to be in writing. Paying off a traditional consumer debt, such as a credit card, within 90 days prior to filing a bankruptcy also creates a recoverable payment. In either circumstance, the bankruptcy trustee can sue the family member or commercial creditor, and seek to recover the funds that were paid. The money that is recovered is then distributed equally among all of the creditors participating in the case, ensuring equal treatment. In a nutshell, the debtor is prevented from “playing favorites”, by favoring some creditors at the expense of others. However, regular monthly payments, such as for an automobile payment or house payment, are generally not recoverable. If you have repaid any debts outside of the normal course of business within a year prior to your bankruptcy filing, notify your bankruptcy attorney to make sure that it will not create any complications for you, or for the individuals or businesses to whom the debts were paid.
As always, the key issue in bankruptcy is transparency. Many bankruptcy attorneys have been involved in cases where withheld information would not have been problematic if properly disclosed by the debtor in their bankruptcy petition. However, the non-disclosure became a problem later on because the information was discovered by a creditor or bankruptcy trustee in some other manner, which then brought the debtor’s credibility into question.. In this age of technology and information sharing, it is very difficult to hide information from trustees and creditors. Any information exchanged in a consultation with a bankruptcy attorney is subject to the duty of confidentiality, so there is no reason to withhold information, even if it is something that you may not consider to be material or important. In this way, you can receive the best possible advice and not jeopardize the financial affairs of third parties.