[…] The value of an interest in […] real or personal property that the debtor or a dependent of the debtor claims as a homestead shall be reduced to the extent that such value is attributable to any portion of any property that the debtor disposed of in the 10-year period ending on the date of the filing of the petition with the intent to hinder, delay, or defraud a creditor and that the debtor could not exempt, or that portion that the debtor could not exempt […] if on such date the debtor had held the property so disposed of.
For example, say you were doing fine with a mortgage and a car loan, but then you were involved in an accident and racked up $20,000 in medical bills, and now you can’t afford to pay everything. One possible strategy might be to use payday loans to “punt” the problem down the field. That’s a bad idea and will most likely cause you more harm. On the other hand, if you can scale back on other expenses and slowly pay down the medical debt – that’s likely to be more successful.
- Drawing from a 401(k) is going to trigger tax consequences.
- Borrowing from a 401(k) means you’re still paying on a debt, with interest. It’s the proverbial “robbing Peter to pay Paul” except in this case, you’re robbing yourself.
- The obvious: you’re depleting savings that is meant to carry you through your retirement.
- You’re doing so to pay a debt that may be dischargeable in bankruptcy, and using an asset that is fully exempt in bankruptcy. (In other words, someone who burns $10k of his retirement funds to pay a $10k credit card bill could have had the $10k debt paid off and fully retained his retirement money in Chapter 7.
- If you are using these funds to settle a debt (pay less than what is contractually owed), your credit will still be impacted negatively, and you are likely to have tax consequences as a result of the canceled debt.
- How much is the trustee going to get paid? The trustee retains a percentage of the assets he recovers for the work he must perform in distributing the assets. If the only thing he can go after is $100, the costs of administration will far outweigh the mere pittance he will recover.
- How much are the creditors going to get paid? $10,000 is a lot of money if the unsecured claims are only expected to be $25,000. Even after administrative costs, creditors would still likely get paid over 33% of what is owed them. But if you owe $200,000, the percentage is a lot less (less than 5%).
- How easy will it be to liquidate? Is the trustee seizing money in a bank account? If so, that is easy to convert and use to pay creditors. But what if the exposed money is in household furniture and appliances? Even if the trustee realized the full market value that you estimated your stuff to be worth, he still has to go through the process of selling the stuff, and that costs money. And the likelihood of him selling your stuff for even a fraction of what you think it’s worth is still pretty low.
- Is the asset contingent? Sec. 541 of the bankruptcy code describes “property of the estate” and includes contingent assets – or assets that you are entitled to possess, but do not yet possess. There are tons of contingent assets. Rights to tax refunds are the most common. Unresolved lawsuits, inheritances, and residual income are all examples of possible contingent assets (depending on the specific circumstances). Okay, so you have a lawsuit pending against someone else for $5,000. Does that mean the trustee wants to hold open your case for months or years, waiting for it to resolve? Sometimes he will, but often times, he won’t bother.
- Don’t try to hide any assets. Anything not disclosed, if discovered later, cannot be taken as exempt – even if you had plenty of exemption to use. And trustees WILL go after non-exempt assets, if for no other reason than to make an example of you and deter other people from lying to the bankruptcy court. Learn from the mistakes of others.
- Believe it or not, I have learned that it’s actually better to over-estimate the value of your assets. Trustees can usually tell if you’ve perhaps been a little too generous about their personal belongings. They can also tell if you’re short-changing your schedules. If they believe that is the case, they will scrutinize your schedules moreso, and perhaps hire their own appraiser. If you thought you had problems with $1k in non-exempt equity, wait until the trustee gets real values and finds out that you actually have $10k exposed. (It’s worth dispelling a common myth at this point. Trustees do not actually come out to your home to look at your stuff. But they can, and they will, if they have good reason to believe you have not been truthful on your schedules.)
- Check your exemption options. For example, Wisconsin residents who have resided in Wisconsin for at least two years may choose between federal exemptions and Wisconsin state exemptions. Each set has its own benefits and drawbacks, so debtors may select whichever set is most beneficial to them (though they may not mix-and-match). Which exemptions you are entitled to depends on which state you currently reside in, and which state you have resided in during the past 730 days. (We’ll discuss residency requirements and exemptions a different day.)
- You will have access to a variety of exemptions, which can only be applied toward certain types of property, and most of which have dollar limits to them. To the extent the exemptions allow you to do so, leave exposed things that are hard for the trustee to sell, like furniture and appliances. Cover up cash and cash-like items (aka liquid assets, such as bank accounts, whole life insurance policies, retirement accounts, tax refunds, stocks, and bonds). Then cover up real estate and motor vehicles – yes, the trustee has to sell them, but they’re easier to sell. Whatever is left – that is what you want to leave exposed.
- If there are assets secured by liens that you intend to surrender back to the bank, leave those items exposed, too. The trustee can try to intervene in a repossession or foreclosure action if he chooses to. But since you’re already resigned to losing the property, it’s no skin off your nose. If you have a piece-of-junk snowmobile sitting in your backyard collecting rust that you could care less about – don’t waste exemptions on it if they can be better utilized elsewhere.
- Expose contingent assets. These are things you don’t have yet, and it’s harder to miss things that you never had possession of in the first place.
- If the trustee is not willing to abandon assets completely, he is still likely going to be open to a settlement – particularly if you have left exposed contingent or hard-to-sell assets. He doesn’t want to go through the hassle of administration, or leave a case open for months or years to collect a contingent asset. He would much rather get a cash payment from you, in exchange for which, he will settle for less than what is exposed. So, for example, let’s say you have $5k exposed in a car. The trustee may settle for $3k and you get to keep the car. Now, this isn’t Chapter 13, so you would be able to stretch payments out for 3-5 years. In Chapter 7, if the trustee settles, he is going to expect payment pretty promptly. Sometimes he may give you a month. Sometimes 3-4 months. The longest I’ve ever seen a payment plan for was 12 months, and that was for an extremely large asset (as I recall, $60-70k).
Property listed in this paragraph is […] any property that is exempt under Federal law, other than subsection (d) of this section, or State or local law that is applicable on the date of the filing of the petition to the place in which the debtor’s domicile has been located for the 730 days immediately preceding the date of the filing of the petition or if the debtor’s domicile has not been located in a single State for such 730-day period, the place in which the debtor’s domicile was located for 180 days immediately preceding the 730-day period or for a longer portion of such 180-day period than in any other place;
If the effect of the domiciliary requirement under subparagraph (A) is to render the debtor ineligible for any exemption, the debtor may elect to exempt property that is specified under subsection (d).
- The maximum amount that can be garnished is 20% if your “disposable earnings” (your gross wages, minus amounts taken out for federal tax, state tax, and social security taxes, but does not include other deductions such as insurance or union dues). If you have child support deducted from your paycheck, then the combined amount of child support deductions and the wage garnishment can be no greater than 25% of your disposable earnings.
- Garnishments typically last for 13 weeks. They can end sooner if the underlying debt is fully paid. They can be extended for a longer period either by stipulation, or by a new application that takes effect after the first 13 week period is up. Also, public employees can be garnished until the debt is paid off.
- You can only be garnished by one general creditor at a time (does not include tax levies, federal student loan levies, and child support).
- You cannot be fired solely because of a wage garnishment (though most employment in the United States is “at-will” employment, which means an employer can fire you for any reason or no reason at all, so long as it is not solely for a discriminatory reason). There is also an exception to this rule if you have a collective bargaining agreement that permits termination under such circumstances.
- You may dispute a wage garnishment. To do so, click here for the form. Send a copy to the Clerk of Courts, the creditor and/or the creditor’s attorney, and your employer. Your employer must not garnish you if you file one of these responses, unless and until the court overrules your application and directs the employer to proceed with the garnishment. Your employer must wait at least 5 days after your pay date before sending garnished funds to the creditor, to allow time for you to file a dispute.
- Most creditors cannot touch certain types of income (such as social security). However, if you owe debt to the government, social security and other types of income can become fair game.
- You have filed bankruptcy and the automatic stay is still pending. (In pending Chapter 13s, only until property of the estate revests back to you.)
- You have received a bankruptcy discharge, and the debt was incurred before your bankruptcy case was filed.
- Your household income is below the federal poverty guidelines.
- If your household income is above the federal poverty guidelines, but the garnishment would bring you below the guidelines, you can only be garnished to the extent that it brings you down to the poverty guidelines.
- Currently, or in the past six months, you have received – or determined to be eligible for – public assistance (food stamps, W2, SSI, etc.).
- Filing a joint bankruptcy before a divorce is finalized is almost always the preferred route. It’s cheaper to file one joint petition rather than two separate individual petitions. Both debtors benefit equally from the discharge, neither one has to rely on the “phantom discharge”, and it renders most “hold harmless” clauses in divorce papers moot.
- On the other hand, some debtors don’t want to file joint because of impact on credit scores, because bankruptcy causes the revelation of certain financial information that could give one of the spouses leverage in divorce proceedings, or because the income potential of one debtor disqualifies both debtors – as a married couple – from Chapter 7.
- For reasons beyond my comprehension, creditors are not required to abide by the terms of divorce orders. Which means that a bankruptcy filed after divorce may not be as effective as a bankruptcy filed before divorce. Divorce orders usually contain “hold harmless” clauses. Which means if one spouse gets a debt discharged in bankruptcy that was assigned to him or her in the divorce, and the creditor then pursues the other spouse for payment, the second spouse can go into family court and get a non-dischargeable support order from the first spouse for damages resulting from their failure to pay the debt assigned to them in divorce. So, if you do file divorce before bankruptcy, make sure that your attorney knows of your intent to file for bankruptcy and that your divorce papers do not include “hold harmless” clauses. (DO NOT FILE FOR DIVORCE WITHOUT AN ATTORNEY! Most divorcees who have done so will tell you that it was a mistake.)
- Get rid of the mentality that you and your spouse split everything 50-50, or that credit cards in one spouse’s name are not the responsibility of the other spouse. Wisconsin is a community property state, which means that married spouses are deemed a single legal entity, and each spouse is presumed to own a whole and undivided interest in all assets (and share a whole and undivided liability in all debts).
- Consequently, a bankruptcy petition must disclose the assets of both spouses (if the divorce is not yet finalized), even if one spouse is filing without the other spouse. Assets of the non-filing spouse that are not disclosed (even if it is due to the non-filing spouse’s lack of cooperation) cannot be taken as exempt, which means the trustee can seize and liquidate unreported and non-exempt assets of the non-filing spouse. While the filing spouse might not care, this adverse impact on the non-filing spouse could hurt the filing spouse when it comes time to settle the divorce.
- Additionally, in a non-filing spouse scenario, only the filing spouse can claim exemptions (which are generally half of the exemptions available to joint filers), often creating non-exempt assets where there would be none of both spouses filed.
- Bankruptcy filed after divorce also must contend with a potential fraudulent conveyance issue. Were the assets in divorce split roughly 50-50? If not, why? If the non-filing spouse got the house, both cars, and all the jewelry, and the filing spouse got stuck with nothing, there could be a fraud issue. It is not unheard of for a married couple to get divorced just to protect assets from unsecured creditors (in fact, I had a client once myself who tried to pull this stunt, and I fired her as a client).
- In the event that a single filer has enough exemptions on his own to cover the assets of both spouses, then the question becomes whether the filing spouse can exempt the non-filing spouse’s interest. If that seems strange to you in light of what I said earlier about community property, you’re not alone. It seems that this is where the “whole and undivided interest” standard breaks down into a 50-50 theory, again for reasons beyond my comprehension. At any rate, the court then looks at the non-exempt asset. Is it readily divisible – like a bank account? If yes, the debtor can only exempt their half share. If it is not readily divisible (like a house or single vehicle), then the debtor can exempt both spouse’s share in the asset, provided enough exemptions exist to cover the asset.
- Once a divorce is final, former spouses can no longer file a joint petition. A joint bankruptcy petition must be filed before the divorce is finalized.
- As you may have gathered, it is quite simple for one spouse to adversely impact the spouse by filing for bankruptcy. Some people would say this is unfair. I agree. But it is also part of the cost of marriage that too few people understand and appreciate before they get married.
- I get a number of clients who cannot provide me with the information of their non-filing spouse because they have been estranged for so long. They may not be on speaking terms, or they may not even know how to contact the spouse anymore. Does that mean the filing spouse is off the hook for disclosing the information of the non-filing spouse? Unfortunately, no. As stated earlier, unreported assets could potentially be liquidated by the trustee, and even if the filing spouse doesn’t care, it would impact the divorce proceedings when they come. The solution – if you are unable or unwilling to work with your spouse in a joint filing is to file for divorce first. Newspaper publication resolves any problems with being unable to locate/contact the other spouse. Just remember that in filing divorce before filing bankruptcy, to be on the lookout for “hold harmless” clauses that can affect your discharge.
A preferential transfer occurs when a debtor favors one creditor over another by paying that creditor to the detriment of other creditors. Preferences are treated with disfavor in bankruptcy because they contradict the fundamental bankruptcy policy of ensuring the equitable distribution of a debtor’s nonexempt assets among similarly situated creditors. In re Eckman, 447 B.R. 546, (Bankr. N.D. Ohio 2010)
The reason that Congress created an extended period for insider transactions is simple. In a corporate setting, insiders are typically the first to recognize that a company is failing, and they may have an incentive to pay themselves, or to pay obligations which might otherwise result in their personal liability. The longer preference period was established to address the concern that a corporate insider (such as an officer or director who is a creditor of his or her own corporation) has an unfair advantage over outside creditors. […] Likewise, in a personal bankruptcy a debtor is likely to want to avoid harming family members and will pay (or “prefer”) debts which would impact them. The bankruptcy code strives to eliminate the incentive for doing so by providing that these payments (or transfers) can be brought back into the bankruptcy estate for the benefit of all unsecured creditors, not simply those closest to the debtor.
Payments to the “lender” in such a scenario are “for the benefit of” the guarantor because every reduction of the debt reduces the guarantor’s potential liability to the lender. Osberg v. Halling (In re Halling), 449 B.R. 911, 915 (Bankr. W.D. Wis. 2011)