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A Wild Time Before Filing Bankruptcy

John and his wife, Mary, are faced with the realization that they are going to have to file bankruptcy pretty soon. They’ve been working hard and this unfortunate turn of events doesn’t seem fair. Therefore, they decide to do what they can to minimize (in their misguided minds) the unpleasant effects of filing a bankruptcy.

John and Mary haven’t had a vacation in years and so they decide to spend a week in Paris. They charge most of this trip on their credit cards knowing that they will be soon filing bankruptcy and listing the credit cards as debts that they owe.

While in Paris they need spending money so they get several thousand dollars in cash advances on one of their credit cards.

John and Mary have several automobiles. One of these happens to be a Cadillac that John inherited. It’s real nice and has a current value of $20,000 and there is no money owed on it. John and Mary know that they stand to lose this car if they file a chapter 7 liquidation bankruptcy, which they want to do. John transfers the title to his uncle in exchange for $500.00.

Mary owes her mother $10,000. She wouldn’t want to not pay her mother or to have a bankruptcy trustee take her funds so she empties out her bank accounts and sends mom $10,000 without paying any other creditors.

John and Mary file for bankruptcy immediately upon their return from France. Because they now have no money left, they elect to do the bankruptcy themselves and spare the cost of hiring an attorney to help them.

About a month after filing their bankruptcy John and Mary go to their first meeting of creditors. This meeting is mandatory for all debtors filing bankruptcy. It is held in front of a bankruptcy trustee and creditors have the opportunity to attend should they so desire. At the meeting the trustee questions the debtors as to their assets and how they have handled certain financial matters.

Following the meeting of creditors, John and Mary are surprised when the trustee sends them a letter notifying them that the trustee believes (correctly) that the Cadillac and the payment to Mary’s mother should be reclaimed by the trustee and made a part of the debtors’ bankruptcy estate. The other shoe falls when the credit card companies who funded the vacation and cash advance file a petition in court to have the debts owed to them declared to be not dischargeable.

Had John and Mary consulted with an attorney, they would have been advised that consumer debts owed to a single creditor and aggregating more than $650 for luxury goods or services incurred by a debtor within 90 days of the order for relief (essentially the filing date of the bankruptcy) are presumed to be non-dischargeable. A similar presumption arises with respect to a cash advance in excess of $925 made within 70 days of the order for relief. That certainly puts a damper on the vacation spree.

With respect to Mary’s mother, the trustee has the power to set aside and recoup a transfer to a creditor in excess of $600 if it’s made within 90 days before the filing of the bankruptcy. If the party paid is a friend or family member (considered an, “insider”) then the time frame is 1 year. Thus the trustee will be talking to Mary’s mother and demanding back $9,400 (The $10,000 less $600).

John’s Cadillac is coming back from the uncle. It is a fraudulent transfer made within 2 years of filing bankruptcy. It is fraudulent because John received less than a reasonably equivalent value in exchange for the car. Arguably, he also made the transfer with the intent to hinder, delay or defraud his creditors which would make it a fraudulent transfer.

The foregoing is a sampling of the problems that a debtor can have if their bankruptcy filing is not thoroughly thought out before hand. There are other problems that can occur without proper advice.

Every case is different and many factors go into a decision to file or not file a particular chapter of bankruptcy. Anyone potentially facing a bankruptcy should seek counsel experienced in that area of the law.

Bernhardt Klippel is an attorney who concentrates his practice in the field of bankruptcy. He may be reached at (314) 862-5300.