For debtors, the path they traveled which led to a bankruptcy is long and varied.  There were generally many signs along the way that point towards a looming bankruptcy.  For many debtors, the final indicator that a bankruptcy is their best option is a wage garnishment or a bank levy.  Prior to that point, the creditor’s only option had been to accept voluntary payments from the debtor.

With a wage garnishment or a bank levy, the creditor can now force the debtor to make involuntary payments.  It is the involuntary nature of these payments, coupled with the fact that a garnishment is 25% of every paycheck and a bank levy is 100% of the funds on deposit, which often triggers a debtor to file bankruptcy.

When a debtor files for bankruptcy and an involuntary payment has been made to a creditor in the 90 days before filing, it is possible to recover those funds for the debtor as a preferential transfer.  The funds that the creditor obtains by a garnishment or a bank levy are a preference under 11 U.S.C. § 547(b) because the garnishment or levy is a transfer of an interest in the property of the debtor to a creditor made while the debtor was insolvent and within 90 days before the date of filing. This transfer has therefore enabled the creditor to receive more than it ordinarily would not have received but for the transfer.

In order to recover the funds for the debtor, certain requirements must be met.  First, the amount garnished in the 90 days before filing must equal $600.00 or more.  Also the garnishing creditor must have actually cashed the checks from the debtor’s payroll within the 90 days.  Because a garnishment is a two step process (step one: payroll withholds the debtors wages; step two: the money is sent to the creditor), it is possible for a debtor to have had money taken out of his/her pay without that money every reaching the creditor.  It is therefore important for the debtor’s attorney to determine which funds were remitted to the creditor and when.

Any funds still being held by payroll at the time of filing will be returned to the debtor, not because it is a preference, but because it violates the court’s injunction which takes effect at the time of filing.

Second, the debtor must have listed this preference on the Statement of Financial Affairs and on Schedule B and have exempted it on Schedule C of their bankruptcy petition.   In essence, the garnishment is an asset which must be protected using the debtor’s exemptions.  If the debtor does not have room to protect the garnishment under the debtor’s exemptions, the Trustee assigned to the case will be entitled to the returned garnishment. If the funds are taken by the Trustee, the Trustee will then redistribute the funds more fairly amongst all of the debtor’s creditors after paying their own fees.

Third, no objection can have been filed by the creditor in question. If an objection to the dischargeability of the debt in the bankruptcy is raised, that matter must be resolved before a recoupment of the garnished funds can be considered.

Once it is determined that the garnishment is recoverable, a debtor can work with his or her attorney regarding the proper method of recovery.  If the creditor does not return the garnishment voluntarily, a debtor has the option to sue the creditor to return the preference.  Generally, creditors will return the funds voluntarily to the debtor once a demand letter has been sent.  The window of opportunity to file the law suit is only open during the pendency of the bankruptcy.  After that point, the debtor has no legal remedy if the creditor refuses to cooperate and can only hope that the creditor returns the funds voluntarily.

It is important for the debtor’s attorney to understand the timeline associated with a garnishment recovery.  Sending a demand letter before the time limit for the creditor’s objection to be filed has passed, for example, is pre-emptive: the debtor is not yet entitled to that preference.  By the same token, filing a law suit to recover the funds too late can preclude recovery entirely. Also important to note is that a debtor understands his/her rights to the garnishment and the importance of providing his/her attorney promptly with any information that is needed to determine the recoverability of the garnishment.

According to statistics compiled by the Administrative Office of the U.S. Courts, consumer bankruptcy filings for the first half of 2010 are up 15% compared to filings for the first half of last year.

Chapter 7 filings have increased 17 have increased% from last year.

An ABI study also notes that bankruptcy filings for people ages 55 and older have increased.

This year will mark the first time that have been more than 1.5 million bankruptcy filings in a year since the bankruptcy laws were dramatically changed in 2004.

The Making Home Affordable Program can help homeowners keep their homes even if they have filed a bankruptcy. The HAMP program helps homeowners modify their mortgage to make their payments more affordable.

Some of the requirements for HAMP are:
– Monthly mortgage payments including tax, insurance and association dues which exceeds 31% of the debtors’ gross income
– Ownership of a one- to four-unit home which is the principal residence for the debtor
– The mortgage having been received prior to January 2009
– The amount of the mortgage being equal to or less than $729,750 (on the first mortgage)
– Documented financial hardship
To apply for HAMP, a homeowner must submit an initial packet to their mortgage servicer. This packet must include a completed Request for Modification Affidavit, A completed Tax Authorization Form, and proof of income. These forms can be found at www.MakingHomeAffordable.gov.

When an individual files bankruptcy, the trustee assigned to his/her case will examine payments made to creditors before a case was filed. If the payments to an individual’s creditors meet certain requirements, they are considered preferential payments.

If an individual filing bankruptcy has made preference payments, the trustee administering the case may go after the creditor to whom the payment was made and force the creditor to give the trustee the amount of the payment. The trustee will then take the payment and distribute amongst all of the debtor’s creditors.
Under § 547(b) of the Bankruptcy Code, a “preference” is any transfer made by the debtor that meets the following criteria: (1) the transfer is to or for the benefit of a creditor, (2) the transfer is for or on account of a prior debt owed by the debtor before said transfer was made, (3) the transfer was made while the debtor was insolvent, (4) the transfer was made either 90 days before filing the bankruptcy petition, or one year before the filing of the bankruptcy if the payment was made to an insider, and (5) the transfer enables the creditor to receive more than the creditor would have received either under a Chapter 7 case or if the transfer had not been made at all.

Preferences are most commonly problematic within the context of payments to friends or family. If a transfer is made to a non-insider, the debtor typically is concerned less about the effect on the creditor.

When the preference payment has been made to a friend or family member, there are several ways to handle the situation.
Sometimes a debtor will wait until the preference period has run out before filing their bankruptcy. For example, if a debtor repaid his/her mother in September of 2009, he/she may wish to wait to file his/her case until it has been after a year since the payment was made. If the debtor waits for the preference period to run out, then there will not be an issue in his/her case regarding the payment.

It should be noted that the debtor will want to make certain of when the payment was made. A miscalculation of one day can make the difference in whether a payment is a preference or not.
If the debtor absolutely cannot wait, another option would be to file a Chapter 13 case. Under Chapter 13, as long as the total amount paid by the debtor over the course of the Chapter 13 plan is at least as much as the debtor transferred, then no additional funds need to be paid, and the trustee will not pursue the matter with the transferee.

If a Chapter 13 is not an option, then the trustee who is assigned to the Chapter 7 Bankruptcy will attempt to retrieve the funds. Sometimes the trustee will allow the debtor to stand in the shoes of the individual to whom the preferential payment was made and allow the debtor to pay back the preference on the behalf of the transferee. Most trustees will allow the debtor about five months to pay the preference amount.

When an individual files for bankruptcy, a trustee is assigned to his/her case. It is the trustee’s duty to administer the case. Part of the administration of a bankruptcy case involves an examination of financial transactions occurring before an individual files for bankruptcy. One thing trustees look at is whether a debtor has transferred any property out of his/her name before filing. The trustee is able to look into transactions between a debtor and a family member or close friend that have occurred within six years of filing a bankruptcy.

Many transfers of property which are commonplace outside of a bankruptcy context can be characterized as fraudulent if a debtor files for bankruptcy. If a transfer is considered fraudulent, the trustee is allowed to go back to the individual who received the transferred asset and demand the asset or the fair market value of the asset. If that individual does not return the asset or the value of the asset willingly, the trustee then may sue that individual and get a judgment against that person for the value of the asset or force the person to return the asset. Understandably, many debtors are greatly distressed by this.

Whether a transfer is considered fraudulent is determined by the bankruptcy code and surrounding case law. Section 548 of the Bankruptcy Code defines fraudulent transfers as transfers made with [1] “actual intent to hinder, delay, or defraud” a creditor or [2]  a transfer in which the debtor “received less than a reasonably equivalent value in exchange for such transfer…and was insolvent on the date that such transfer…or became insolvent as a result of such transfer…”

Actual Fraud occurs when the debtor transfers property with the intent to hinder, delay, or defraud a creditor.  A debtor may not always disclose the true reasons behind the transfer, and to prove intent the court may look to the circumstances surrounding the transfer.  The badges of fraud that indicate fraud include: the timing of the transfer, the relationship between the debtor and the recipient, the lack of adequate compensation the debtor got for the transfer, and whether or not the debtor maintained control over the asset after transferring title.

A common example of actual fraud is:  A debtor is behind on his credit card payments and realizes that he is on the verge of being sued by his creditors.  He has  hunting land up north that is free and clear and worth $30,000.  He is worried that creditors will sue him and take the land. He transfers title to the property to his brother without having the brother pay him the $30,000 that the land is worth. 

This is actual fraud because the debtor intended to hide property from his creditors.  The trustee has a few options.  He or she can (1) not discharge the debtor’s debts, (2) make the brother pay $30,000 or (3) force the sale of the property.  The trustee will distribute the $30,000 among the creditors to pay a portion of the debt owed to them by the debtors.

Another form of fraud is called “constructive fraud.”  It is constructive rather than actual because there need not be any intent on the part of the debtor.  Constructive fraud occurs when a debtor (1) sells or gives away an asset for less than fair market value (2) at a time when he or she is insolvent.  Fair market value is determined on a case by case basis.  In essence, when the court takes into consideration all factors surrounding the transfer, it is determining if the debtor did not receive proper consideration for the transfer, i.e. whether or not the debtor gave someone a deal or a gift. 

Insolvency is shown by determining that the debtor’s liabilities are greater than his or her assets.  A simple way to conceptualize this is by answering the question: was the debtor able to pay his debts at the time of the transfer?  If the answer is no, the debtor is insolvent.     

A common example of constructive fraud is: A debtor who has not been able to stay current on his credit card bills, has an adult daughter whose car has just broken down.  The debtor gives his daughter his older car worth $3000 to take and use as her own.  The debtor transfers the title to his daughter’s name without having the daughter pay for the car. 

This is constructive fraud because the debtor did not give the car to his daughter intending to hide it from creditors.  Instead, his motives were innocent: he only wanted to help his daughter who was without a car.  However, the trustee can make the daughter (1) pay $3000 to keep the car or (2) force the sale of the car, using the profits to divvy up among the creditors.  

Debtors who file for bankruptcy generally do not want to involve their family or friends in the process and see it as unfair that the trustee can take back property given to them. However, creditors also have rights and sometimes have a right to repayment in a bankruptcy case. 

This aspect of the bankruptcy code is designed to keep individuals who are filing bankruptcy from cheating their creditors by hiding assets. Although this is often not the debtor’s true intention when the transfer occurred, the person filing the bankruptcy may still encounter problems under this section of the bankruptcy code.

It is important for an individual who may consider a bankruptcy to speak to an experienced attorney before any such transfers are made.

Attorney Jeff Bursell from Hoglund, Chwialkowski & Mrozik will be a participant in the annual golf tournament held by Anastasi and Associates.

The tournament will benefit local charities. All donations will go directly to the selected charities. Plus Anastasi and Associates will match every dollar donated.

The proceeds from this event will be donated to Family Pathways and Family Means. Family Pathways is a local, grassroots organization which offers a food shelf, thrift store and senior and youth services. Family Means offers mental health counseling, consumer credit counseling, caregiver support, an employee assistance program and youth enrichment programs.

According a study prepared for the AARP’s Public Policy Institute, “the rate of bankruptcy filings among Americans 55 and older has nearly tripled since 1991.” The results of this study are a cause for concern because the results “indicate that financial security is progressively eroding for many older Americans.” (As printed in Consumer Bankruptcy News, Volume 18, Issue 16, 2, July 3, 2008.) A logical question may be why some of these older Americans are filing bankruptcy, especially where many may be exempt from the actions of their creditors. Unfortunately, many of these older Americans choose to file to stop creditor harassment or file as a means of estate planning so their relatives do not have to “deal with the debt.” One common pitfall in bankruptcy that tends to harm elderly debtors or their family members is the creation of a life estate.

Life estates may pose a hurdle to elderly persons if they do not live in the home, but more often, the elderly person conveys real estate to a family member and reserves a life estate for him or herself. If the family member experiences financial difficulty, then the transfer of property may be an insurmountable obstacle in the family member’s bankruptcy case. This remainder interest in real property is an interest in real property that must be protected in a bankruptcy case. If the interest is unprotected, then the remainder interest becomes property of the bankruptcy estate, which causes problems for both the life estate holder and the remaindermen.

Under the Bankruptcy Code, the conveyance of a fee simple, reserving a life estate, acts as a present conveyance of the real property and, therefore, the real property becomes property of the bankruptcy estate. Rarely is it a problem to protect the debtor’s interest where the debtor is the holder of the life estate and where the debtor lives in the home of which he holds the life estate. (See Peoples’ State Bank v. Stenzel (in Re Stenzel), 301 F.3d 945, 948 (8th Cir. 2002). This debtor typically can exempt the interest in the life estate under the homestead exemption using federal or state exemptions. However, life estate issues arise when the life estate holder or the remainderman is a debtor who does not live in the home even where the debtor’s interest in the real property has not vested. See State ex rel. Cooper v. Cloyd, 461 S.W.2d 833, 838, 839 (Mo. en banc 1971). See also In re Dennison, 129 B.R. 609 (Bankr. E.D. Mo. 1991). In this scenario, the debtor’s interest cannot be protected using the homestead exemption and can be protected only under the wildcard exemption of the federal exemptions. 11 U.S.C. § 522 (d)(5).

Oftentimes, the value of the interest exceeds the allowable exemptions under the Bankruptcy Code. In these situations, the interest must be purchased from the bankruptcy estate or face the potential sale of the interest. For these reasons, life estates can be a tricky business in bankruptcy cases.

Choosing to file bankruptcy to resolve financial difficulties is clearly a big decision. An equally big decision is determining which attorney should represent you.
Bankruptcy is a complicated process. Bankruptcy laws arguably were designed to discourage individuals from filing bankruptcy. The Bankruptcy Code is riddled with pitfalls and snares consisting of deadlines, caveats and exceptions which can cause an inexperienced person to lose property or to be denied a discharge in their bankruptcy.
You need an experienced attorney to guide you through the bankruptcy process.
Some of the things which a person should consider when hiring a bankruptcy attorney are the following:
Experience: You want an attorney who has significant experience with bankruptcy. Bankruptcy law is intricate. An attorney must be aware of the ins and outs of the Bankruptcy Code and the surrounding body of law to properly advise you. An inexperienced attorney may not be aware of the ways specific hurtles must be surmounted in order to handle a case effectively.
An attorney who merely dabbles in this area of law will most likely have gaps in his or her understanding of this body of law and may not be up-to-date in recent developments. In 2005, the Bankruptcy Code was overhauled. The changes made in the law were significant. The fallout from these changes is still being experienced. Case law constantly is being updated to interpret how these changes will be applied. An attorney who is unfamiliar with bankruptcy may not be on top of these changes or be aware of the significance of the seemingly subtle adjustments.
The practice of law is similar to the practice of medicine. There are many specialties. A divorce attorney may struggle with handling a criminal prosecution in the same way a podiatrist would struggle with handling open heat surgery. Hiring an attorney who is competent in the area of law in which he will be representing you is very important. No reasonable person would hire a podiatrist to perform open heart surgery, and you should not hire an attorney unfamiliar with bankruptcy to represent you in a bankruptcy.
Location: Although bankruptcy law is federal law, bankruptcy law interacts with state law as well. In addition, there are local bankruptcy rules that determine much of the procedures which need to be followed when filing a case.
Level of comfort: Meeting with the person who is representing is important. You should at least have one face-to-face encounter with the attorney you are hiring before you hire that attorney. If you are never allowed to meet with the attorney, you can expect that you will not have access to him when proceeding with your case, and you will not have access to him if there are problems or complications with your case. When you meet with an attorney you should ask yourself the following questions:
– Did he or she answer all of your questions?
– Did he or she discuss what you can expect to happen?
– Did he or she give you a roadmap of the normal course of events?
– Did he or she explain what will be expected of you?
– Did you walk away knowing what will happen next?
If you answer “no” to most of these questions, you should think long and hard before entrusting this attorney to handle your financial future.
Price: Price should not be the determining factor when choosing your attorney. Filing a bankruptcy is expensive and hiring competent counsel will cost you, but hiring incompetent counsel will cost you even more. Having a good attorney on your side is important when pursuing a bankruptcy. Filing bankruptcy is a life altering process. If you commit to pursuing it, you need to make sure that you have someone who will guide you through the process. You need someone who will make sure that your case is not dismissed on a technicality and someone who will help you minimize your losses.
Hiring a cut-rate attorney will get you cut-rate services. Simply put, you will get what you pay for.