One Call: 4 tough bankruptcy issues – income too high; recent credit card usage; house at risk; gift of proceeds from selling house.
This happens all the time. Potential clients call. They know what they want, but are completely unaware of complicated issues such as:
• Are they eligible for the chapter they want?
• Will they be able to get a discharge of the debts they want to get rid of?
• Is their house at risk?
• Is there something they did which could cause a friend or relative to be sued by a bankruptcy trustee.
• What strategies could be implemented to avoid these problems?
Referred by a local attorney, a prospective client called me last week. His income had disappeared due to COVID-19. He had accumulated $100,000 in credit card debt and was scared about the future.
He and his wife had been contemplating divorce, so they sold their home and he let her have all the money to buy a new house in her sole name. They were still living together for economic reasons. He wanted to file chapter 7 to eliminate his credit card debt.
In the first minute, I saw plenty of issues that he was not even aware of.
Issue 1: Eligibility:
To be eligible for chapter 7, there is an income ceiling based upon which state you live in and how many people are in your household. If you are married and want to file bankruptcy without your spouse, you are allowed to, provided you count your spouse’s income in the household budget. Thus, I saw the first problem: Too much joint income..
Issue 2: Dischargeability
Just because you have filed for bankruptcy, you don’t automatically get a discharge of your debts. Creditors have the right to object to their specific debts being discharge if you “ran up your credit cards” just before bankruptcy: even if you used them to buy food and other necessities! Thus, I saw the second problem: These debts might not be dischargeable.
Issue 3: Homestead Exemption
You will not lose your house if you file for chapter 7 bankruptcy, provided the equity in the house (fair market value minus mortgage and Home Equity Loan) is less than your allowable “homestead exemption”. Most people don’t realize it, but the amount of your “homestead exemption” depends upon how many people are named in the deed, and where you live. For example, if you live in New York State you can choose to use the New York State Homestead Exemption for the county you live in. In NYC, that amount is approximately $170,000. On the other hand, if you choose to use the Federal Bankruptcy Exemptions rather than the State Exemptions (certain categories of assets receive better treatment under the Federal Exemptions), the Homestead Exemption is only $25,000. My caller lives in New Jersey, which, unfortunately, does not have a state homestead exemption. Thus, if you live in New Jersey, you will only be allowed to a $25,000 per-person homestead exemption. Thus I saw the third problem: too much home equity.
Issue 4: Prohibited transfers
Most people are not aware that a bankruptcy trustee can cancel transfers of money or property that occurred shortly before bankruptcy if the recipient did not pay for the property, or if the recipient was repaid an existing debt. And the trustee can then recover the money or property from the recipient. This look-back period ranges from 3 months to six years. Thus, I saw the fourth problem: fraudulent transfer by the caller to spouse of half the proceeds from the sale of the house.
After considered thought, I developed a strategy to solve all four problems.
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