Common Client Mistakes Detrimental To A Successful Bankruptcy Discharge
Interviewer: What mistakes do people make intentionally or unintentionally that prevent them from filing bankruptcy or make it not as workable?
James Logan: The number one mistake I see is when people get their tax refund, they pay back their friends and family. And that’s a big problem because the idea again is in 90-days prior to filing, they don’t want you to give all your money to your friends and families and then file a bankruptcy and not pay your creditors.
The Trustee Can Actually Sue a Debtor’s Family to Recover Money and Pay it to Creditors
So, what’ll happen is somebody will get a $7,000 tax refund and they borrowed $1,000 from mom or $1,500 from their brother and they’ll take their tax refund and pay that debt back and that creates what they call a preference. And the trustee can actually sue your mom or your brother to recover that money and pay it to your creditors. So, that’s probably the most common thing. And people don’t even realize they’re doing it and they’re just thinking, “Hey, I get my tax refund. Let me pay back everybody I owe”, and that’s a big problem.
A Debtor Cannot Pay Back a Debt to Family Members Preferentially After Filing Bankruptcy
Interviewer: So, you’re not supposed to preferentially pay one person or another?
James Logan: Yes, especially family members. For family members, a trustee can actually go back up to a year and recover money that you’ve given to your “insiders”usually family members. Again, you’re innocent most of the time. You just think, “Well, mom helped me out when I needed doing 1,000 bucks to get my car fixed and now, I’m paying her back”, and that can be a real problem.
In Case of Joint Assets, One Person’s Mistakes May be Harmful to Both Persons Financially
Sometimes, people will give away assets, or add somebody to your house, add somebody to your bank accounts and that’s a problem because all of a sudden, it’s a joint asset or it’s before mom allowed the son to the house and the son goes out and gets a judgment or something against him and now, all of a sudden, mom’s house is at risk because of the son’s financial problems.
A Bankruptcy Trustee Can Go After Joint Assets if One of the Co-Owners Files Bankruptcy
Interviewer: What happens if like if that happens and the son files bankruptcy?
James Logan: If the mom has equity in the house, the chapter 7, bankruptcy trustee could actually go after the mom’s house. Again, innocent planning where you just think, “Well, something happens to me, my son or daughter needs to have a house”, but it can create a huge problem.
People Generally Prefer to Pay off their Creditors Once They’ve Filed Bankruptcy
Interviewer: Don’t people preferentially pay creditors anyway? I mean like the gas company and the electric company in the house, do you think that people would pay them above almost anything else?
James Logan: Yes. Well, I mean one of the questions on the bankruptcy will ask if you pay more than $600 to any one creditor. And you’re right; sometimes, people will pay one creditor over another. I have seen trustees, I had a trustee once where a lady took a tax refund and paid one credit card and he actually went and sued the credit card company, got the $2,000 back, took a $1,000 for his time and paid the rest out to the creditors.
How the Trustee Manages Repayment of Debts Doesn’t Affect the Debtor
It didn’t matter to my client because why did she care, the money was gone but from the trustee’s perspective, hey this is a case and you could make a little bit of money out but you’re right, it happens all the time. But unless it’s an insider, family member, most times my clients don’t care whether the trustee gets the money back, it’s gone from them and it doesn’t make any difference.