Preferenial payment to creditor before filing chapter 7

[magnru]

I have qualified for chapter 7 under means test. But I don't want to file until I receive a default notice on my property in 2 months. I have income coming in that would make me ineligible in 2 months. I also have had a judgement against me by the State of California for investigation and prosecution which is non-dischargeable. If I pay this judgement in full now I will be qualified to file chapter 7 in 2 months. Is this considered a preferential payment. Daniel

[AngelinaCatHub]

Wow. I am certainly confused. Without a simper and more concise explanation, I could not say anything. Your first post is a bit convoluted

Please make another post simpler .

BTW, Welcome to the Forum. We will help if we can. Nothing of legal value, but only advice. Start over and slower. 'Hub

[magnru]

I'm sorry if this post seems confusing and I hope this doesn't make it more confusing. Here goes- In California I can have up to 26k in assets to file chapter 7 without having to liquidate the excess assets. I currently have a little under that. I am waiting to file chapter 7 till after I receive my default notice on my house as I have a hardship, cannot afford the payment and my loan co. won't modify. By the time I receive the default I will have more than the 26k and would have to surrender my excess assets to my creditors. Last year my former employer was sued and I lost my healthcare license to practice, a judgement handed down from the Respiratory Care Board of California. In addition the care board has charged me for the fees of $5,300. to investigate the case. This is a non-dischargeable debt. They want payment in full or will take me to collection. In a chapter 7 I cannot favor one creditor over another to pay off a debt prior to filing except under certain circumstances. I am wondering if my BK ill be discharged if I paid off this debt in full before filing. Thanks

[Charlie777]

I guess I don't understand why you're waiting.

Why do you need to wait for the default notice on the house? If you aren't current on the house, and cannot keep it current, you won't be able to protect the house in Chapter 7, you would need to file Chapter 13. So are you thinking that by defaulting you'll get a loan mod you weren't able to get previously, and within two months?

If you make a preferential payment of a non-dischargeable debt, the risk is that the Trustee would order the State Board to return the $5,300.00 to the estate. Since the money would then be available to creditors, with non-dischargeable debt being paid first, it would probably go back to the State. So it might be left alone, but you might be better off fining and listing the non-dischargeable debt. Your excess assets would go there first as long as the non-dischargeable debt is also a priority debt.

You say

When you say you will be ineligible in two months, do you mean you'll fail the means test, or be over the median income? You can be over the median income and still pass the means test based on expenses.

I think you really need a solid attorney not a group of forum members advising you to get this right.

[despritfreya]

The only time a Trustee will not seek to recover a preference is when the $$ is paid to a "secured" or "priority unsecured" creditor. If the obligation is simply non-dischargeable, a preference payment will be recoverable. Being non-dischargeable (take student loans for example) does not put the creditor ahead of other general unsecured creditors. A non-dischargeable unsecured creditor (other than those that fall under 11 USC 507) is still a general unsecured creditor.

Des.

[catleg]

That's interesting Des. So if you paid off a student loan, and then later the trustee gets an order from the judge to return a preferential payment to the BK court, does the debt get reestablished with respect to the debtor or is he free of that obligation?

[magnru]

Thanks all for your responses. Wow 11 USC 507 looks complicated. I have retained a BK Attorney who is looking into the matter. In the meantime he advised me not to pay the debt at this time. I guess my question is whether or not the Respiratory Care Board of California is a priority unsecured creditor. My gut feeling is yes. The Attorney said to wait till default on the home loan as it will hold up the foreclosure 2-3 months depending on whether the lender seeks to lift the motion of stay. This gives me additional time to accumulate more funds and find a suitable future rental. When I stated ineligible in 2 months that meant I would have too many assets. I will still pass the means test and be below median income level. I wasn't sure if having too much cash on hand would prevent BK. Do I have to surrender all my cash down to 26k and do I pay off the Care Board as part of the settlement? Legal advised me not to use my credit cards just before filing but I mistakenly used it instead of my ATM to charge gas and a meal around $100.00. I had changed my mind about doing a BK and was just going to let the house foreclose. but then reconsidered. Will this alter my ability to get a discharge? Can't I just pay it off? I have since removed my credit cards from my wallet. Thanks again for your opinions. Daniel

[despritfreya]

So if you paid off a student loan, and then later the trustee gets an order from the judge to return a preferential payment to the BK court, does the debt get reestablished with respect to the debtor or is he free of that obligation?

Yes. This is why if a client wishes to make such a payment we do not file until at least 91 days after the payment is cashed and applied to the account. Remember, 547(b)(5) allows the Trustee to recover $$ paid to the creditor if the payment "enables such creditor to receive more than such creditor would receive" in the context of the Chapter 7. General unsecured creditors (even non-dischargeable ones) are treated equally based upon a pro rata share and are not at the top of the pecking order.

Des.

[GWBcasualty]

<<I wasn't sure if having too much cash on hand would prevent BK. Do I have to surrender all my cash down to 26k and do I pay off the Care Board as part of the settlement?>>

You can contribute to an IRA up to the max allowable contribution.
Before April 15 you can still contribute for 2010 and after you can contribute for 2011. You can protect $10k that way if I am not mistaken.

[magnru]

<<I wasn't sure if having too much cash on hand would prevent BK. Do I have to surrender all my cash down to 26k and do I pay off the Care Board as part of the settlement?>>

You can contribute to an IRA up to the max allowable contribution.
Before April 15 you can still contribute for 2010 and after you can contribute for 2011. You can protect $10k that way if I am not mistaken.

I have though about doing this but I am excluded. Only earned income can be contributed to an IRA and I have none. All of my income is derived from Social Security Disability, Long Term Disability Insurance, Military Retirement, and Pensions from my workplace.

[GWBcasualty]

I have though about doing this but I am excluded. Only earned income can be contributed to an IRA and I have none. All of my income is derived from Social Security Disability, Long Term Disability Insurance, Military Retirement, and Pensions from my workplace.

The alternative is to buy exempt stuff.
As I found many times in the forums, fix your car, buy new tires, get dental work done if needed, etc...

[magnru]

I will make a dentist appt. right away. Just fixed my car for $1,000. last month for a new alternator, seals, cracked transmission mount and seat restraints, but it does have collision damage and could use some bodywork. It could also use a GPS so I don't keep getting lost. Its a 94 Volvo blue book $550. Maybe I'll treat myself to a full body scan as I have many aches and pains. thanks for the advice.

[stratos]

Have you checked w your attorney to see if your income is exempt. I don't know the CA exemptions, but it's seems likely that at least SSDI benefits would be exempt.