preferential payments

[nazstar]

Here is the short version. We make too much for 7 so we were going to file for 13. But, I have an infant and another baby on the way. Childcare is outrageously expensive so I want to quit my job and stay at home with both infants starting in March. My husbands salary would be below the minimum on the means test, so we would qualify for 7, finally (after 6 months).

In the meantime, I will be getting a significant bonus in February. I wanted to use this to pay back some family that loaned me the money short term (before bankruptcy entered the picture). I owe $6,500, 10,000, and 5,100 respectively to my brother, aunt and friend. The last loan was for the 3 months security deposit on a new rental (since they are going to foreclose on our home). Soooo, my question is this: How does the trustee even know that you are paying back friends and family? I've seen people take their yearly bonus and go to a casino to blow it and gambling losses seem acceptable in bankrupcy but it's not acceptable to pay back family? If you withdraw cash from the bank, how do they prove where it went?

[HHM]

I understand your frustration...this situation is one of the weird ironies of BK Law...if you have cash, you can go blow it on gambling etc...in any event, as for the why...its simply that your family and friends are creditors like any other creditor and in the eyes of the court, are not entitled to special treatment.

As for the bonus...if the money is deposited into your bank account, and then withdrawn, the trustee will/can see that on your bank statements. Moreover, the trustee may ask to see your pay stubs which would also show the bonus. Then the trustee will ask YOU...where did that money go...and what do you plan on telling him/her...keeping in mind that you are under oath?????

[nazstar]

I couldn't lie under oath - I'm so bad a lying that it would be totally obvious. But, if I get my bonus, then file 6-7 months later, it wouldn't appear on my bank statements. Don't you have to show 6 months of records? As for my tax returns from last year, I'm not employed anymore so it would be a moot point as to what I made last year.

I'm trying to determine that line between planning when I file in an intelligent manner while not breaking any laws. One lawyer I interviewed seemed really intent on stretching the truth in a lot of areas - ie: I don't pay for childcare but he said I should note an amount. Also, he said to get a new car now since ours is going to die any day now - that monthly expense is allowable and would reduce our amount to the court. There is a dance that seems to go on around that line.

[HHM]

Are you able to file BEFORE you get the bonus?

If you can really wait that long to file BK, do you really need to file BK in the first place?

But sure, if you can wait 6-7 months from receiving the bonus to file, then the bonus is not likely to be an issue.

[nazstar]

I was going to file in January but the lawyer told me that he would have to declare I was reasonably expected to get the bonus anyway - plus if I file now, I'm not eligible for 7. The lawyer was the one that actually suggested we wait.

As for if we need to file, I really don't see any other way:
- We owe $410K on a house that would MAYBE sell for $230K. There is significant structural damage to the house, which would hinder it's sale. (long story - the original sellers lied on the seller's disclosure and we wound up buying a damaged house and a $100K lawyer's bill trying to sue them).
- Each of us emerged from divorces within the last 5 years which left us $110K in debt (just call us suckers)
- We tried debt management and it's not working - the interest and fees are killing us. Plus AMEX wouldn't participate and they want their own payment each month.
- All told, we are $180K in debt plus the deficit on the house. I make $90K a year and husband makes $60K a year. We have $11,000 in payments to make every month and only $8000 coming in and that's with my husband busting his butt in overtime.
- We have a 6 month old and I'm 3 months pregnant. We have no family here to help with childcare and my telecommute/flex time arrangment ends in August so child care will be an issue.

I've tried to dig us out in every way possible. Even credit couselors told me to file for bankruptcy! We don't go on vacation, don't have fancy cars, and our budget is already lean - no luxuries (other than cable which is our only entertainment). In fact, other than housing cost, I'm right at (or below) IRS standards in every expense category.

And we are behind just 1 month (about to be 2 months) in our bills. We were making it off savings, which is gone now.

[oldbaddebts]

On your statement of Financial Affairs, you are going to be asked about any amounts given to "insiders" in the year prior to filing. This is asked under oath at the time of filing, and you are going to have to answer under oath in person that all of the forms are accurate. Paying back those sums of money will likely cause red flags.

That being said, it sounds like bk "may" still be an option, but won't easily allow you to pay the personal loans and file on the rest. You do have the option when you get the bonus of using it to pay any nondischargeable debts (taxes within 3 years, spousal or child support, government fines and the such) or depending on your state or your current assets, may be used for a "shopping spree" of sorts. You can get a bunch of essentials for the new baby and the kids you have (as long as it is stuff needed), anyone need braces or other dental work? Eyeglasses, or maybe laser surgery (I might be pushing it there) or other stuff you have been putting of.

The third thing you can do with the money is maximize your exemptions. Based on where you live, you can have so much equity in cars, you can have so many books, electronics, etc.. Even if you don't really need the stuff, you can use the bonus to obtain stuff that is included in the exemptions in your state. If your state allows a wildcard exemption to keep cash, you can have that limit the day you file.

What you can't do is lump sum pay your "insider" creditors soon before filing. The court can and likely will for this amount take all of the money back, keep a portion for the court, and spread the rest out over everyone you owe. Once the bk is done and over with (just a few months after you file) you can voluntarily pay the insiders.

Now, is that really fair? Not at all. I am one of the gamblers you speak of, and I can and am filing on credit cards and payday loans that I have gotten money from to gamble with. I had a really good paying job (well over median) with nearly no expenses, and gambled all of it away, then got a lesser paying job (under median), still gamble and me filing bk is fine. In fact, they don't question a thing because they can very easily believe I have no assets of any kind.

[treehugger1]

How long do you believe you can hold out until filing? If you can put it off for 16 - 24 months, then you can pay whoever you want in the next few months and not worry about the insiders. Check with your attorney.

Under no circumstance can you afford to not tell the truth.

I would guess that most gamblers who end up in BK, have a history and track record of gambling, verified through cash withdrawls at ATM's in casinos, cash advances on credit cards, etc. While this does not seem fair, they certainly have a paper trail of "where the money probably went."

Can you speak with your family members who loaned the money to you? It is a tough thing to do. While I have not filed BK, my family is quite aware of my current financial strain. I am slowly paying back $10K to one family member. They understand that should I have to file, the trustee may come asking for the money back. However, when I decided to try workign everything out with my creditors, I also started paying back this family member. If I do need to file, I want to make it clear to the trustee that I am currently paying a bit to everyone. Would this help me out? I don't know, but it can't hurt. Again, what does the attorney advise?

[nazstar]

I am one of the gamblers you speak of, and I can and am filing on credit cards and payday loans that I have gotten money from to gamble with. I had a really good paying job (well over median) with nearly no expenses, and gambled all of it away, then got a lesser paying job (under median), still gamble and me filing bk is fine. In fact, they don't question a thing because they can very easily believe I have no assets of any kind.

First off, please don't think I am judging you personally. I was using gambling as an example. I could have used blowing it on a vacation or something similar. In fact, my husband and I frequented casinos at one point - before we started to have problems with the house, started a family, etc. We didn't take out cash advances or the like, but that's where we spent our disposable income. Nowadays, we still go to the casino, but it's only when we get coupons for free play (which isn't so much anymore) - not to gamble our own money.

Secondly, when you went through your bankruptcy, did they ask you where you spent this money, or did they just assume it was all gambling because you said so? How specific do you have to be when you account for how you spend your money? We bought some new camera lenses for my husband this year but that was because he was trying to get side work as a photographer to earn some cash. He hasn't had any paying jobs yet, so I'm afraid those purchases would be seen as luxury hobby items.

As for talking to family members - that would be all well and good but we will be a one income family after we file. I will have no income and my husband's paycheck will just cover rent, food, pampers, and car/health insurance with about $20 left over each month. That's not enough to be paying back family and friends. I will really have to think about waiting to file for 12 months from when I pay them back. That's a long road...

Another thought. When you file for 13, a lawyer told me I can keep 6 months of wages in a back account for "emergencies". Is that also true in Chapter 7? If so, I could park the money in there and pay back family and friends out of that account AFTER I file. That way, I am reporting the account to the court, and not violating preferential payment rules.

[woeisme]

I think if fraud is suspected, or any of your creditors object, the trustee can lookback years to determine if preferential payments are made. I know that stinks, but that's the breaks with Chapter 7. You get your fresh start and no payments to the trustee for 60 months, but the downside is you can't pay your friends and family preferntially over your other creditors.

How fast do your family and friends need/want their $ back? If they are willing to wait, you can do as the other poster suggested, using the bonus for legitimate expenses and items that can be protected with exemptions (I remember you saying your car was falling apart, a more reliable vehicle would be necessary to transport the kids). Then, after the 7 closes, you could try to pay them back with husbands salary, or you could find part time work to pay them back with while hubby watches kids.

[nazstar]

I wouldn't want to commit fraud or break the law in any way. I am just wondering what options are available to me WITHIN the law for making these payments. If I can change the timing of the filing or file for 13 vs. 7, etc. For example, I hadn't thought of using the money for approved expenses - that's this kind of "loophole" I was looking for.

[SinkingFast]

There is another option.

Work long enough to collect the bonus. Due to the cost of child care,............ Go ahead and become a SAHM/SAHD. Wait out the necessary time for your income to drop below the Median on the CMI.

List every one. Tell your family and friends in advance what's gonna happen. That you're filing for BK. You have to list all debts. You cannot show preference amongst your Creditors.

BUT, there is no law forbidding you from voluntarily repaying any debt Discharged in BK afterward. And that's what you intend to do. Pay them back when the dust settles.

[nazstar]

But what do I do with the bonus I was going to use to pay them back when everything settles? Can I keep that as part of an emergency fund? If I collect it, and don't spend it on allowable expenses, then what happens to it? I would suspect the court will say, "well hello there, lady. What's this large cash balance in your savings account. tsk.tsk.tsk. gimmie that!!!". I would doubt they would be kind enough to just let it sit there until after the filing was done - unless there was a way to protect a certain amount (like I was told exists in Chapter 13).

[SinkingFast]

You may or may not be able to keep the money. Depends on your Exemptions.

What State do you live in?? Are you planning to keep or surrender the house??

Some States allow for the use of Federal Exemptions. Some States allow you to apply any unused Homestead Exemption to any other property.

A lot of how much money you can cover depends on where you live, how much equity you have in your house, and/or what you plan to do with your house.

[nazstar]

Flordia. Walking away from the house with a deficit of about $200K (house has structural damage). We own no other assets worth anything - some jewelry worth about $1,000 total if I were to pawn it. We each have a car - husbands appraised at $500 and mine at $4000.

[genseeker]

What about opening an IRA with the money. I know retirement accts can be protected in a BK7. Could she use it to open an exempt retirement acct and then, once her BK is discharged, use the money to pay back her friends and family?