Tuesday, March 8, 2011

Preferential Payments In Bankruptcy

Since a chapter 7 bankruptcy is a liquidation of assets (though I've said before that in many cases, there is nothing to liquidate so no need to panic), part of our bankruptcy code includes rules for preferential payments. It is imperative to understand what preferential payments in bankruptcy are as well as several simple rules that govern them.

For bankruptcy, preferential payments are debt payments made to a creditor prior to filing a chapter 7 bankruptcy that gives one creditor more than they would receive in your chapter 7 bankruptcy while other creditors get less (or nothing). The preference period is the 90 days prior to filing for most creditors.

You may want to pay off one creditor prior to filing in hopes of retaining that account after the discharge. (Most creditors will close your account anyway after you file, even if you owe them nothing, so trying to keep an account alive is usually futile.)

For example, you pay off creditor X right before filing but pay nothing to Creditor Y. You have given creditor X a preferential payment and the court could demand that creditor X return those funds to the bankruptcy estate so that they can be equally divided amongst all creditors.

The preference period goes back an entire year if the payee is an insider. Insiders are friends, family members, etc.

You may understandably want to pay off a friend of family member that you owe money to prior to filing so that you don't have to include them in your bankruptcy. But, just like in the case of regular creditors, the trustee can go after any preferential transfers made to insiders. And, as I already stated, because the payee is an insider, any preferential payments going back an entire year can be seized.

For advice concerning preferential payments or a preference payment specific to your case, please consult with your attorney.

Good luck to all,


Friday, March 4, 2011

How Do I Go Bankrupt?

When someone asks me "How Do I Go Bankrupt?", I tell them that it will depend on their own unique situation and what bankruptcy chapter they qualify for.

I firmly believe, and keep repeating, that you should seek the advice of a bankruptcy attorney if you are going to file bankruptcy. That said, while I can't tell you exactly how to go bankrupt because I don't know your situation and I am not a lawyer, I can tell you the bankruptcy steps that I took to receive a discharge in the chapter 7 that I filed.

  • I met with a number of bankruptcy attorneys and hired the one I was most comfortable with. My attorney let me pay him off over time. For tips on hiring a good attorney, read my bankruptcy attorney tips.

  • I gathered the paperwork that my attorney told me to gather (your attorney may require additional documents). These were my last two tax returns, the last six months of pay stubs, and I filled out a creditor matrix. The creditor matrix includes all companies, or persons that you owe money to, including addresses, balances, and account numbers. Collection agencies also needed to be included.

  • I took the mandatory pre-filing credit counseling course. I took this online and it took about two hours and cost about 35.00. I was able to print the certificate needed for filing on my own printer at home.

  • I finished paying off my lawyer's retainer and the court filing fee. (Attorney fees will vary. Court filing fee is 299.00.)

  • I submitted all the necessary paperwork and my lawyer filed my bankruptcy. The automatic stay went into effect and my creditors were barred from contacting me in any way about the debts.

  • I attended the 341 Meeting of the Creditors that was scheduled for about a month after the filing (this is scarier than it sounds for most people. Creditors rarely show up for a chapter 7 bankruptcy hearing and mine was no different).

  • I took the mandatory post filing bankruptcy course and sent the certificate to my attorney for filing. This course took about an hour online and cost around 35.00.

  • I waited. I waited longer than most people because the Los Angeles courts are usually backed up. Most people who file a chapter 7 and have no complications receive their discharge about 60 days after the 341.

  • I received my discharge. That was two years ago. Since then I live mostly a cash and carry lifestyle and much prefer it. I will never take peace of mind for granted again.
Those are the bankruptcy steps that I took. If you find yourself asking "How Do I Go Bankrupt?", remember that your bankruptcy steps may vary and see my tips for selecting a great bankruptcy attorney.

Best of luck to you,