Hello Jonathan!
Of all the info I have found on line yours is the best. I have 2 questions if you don’t mind answering.

I live in CA and have a judgment against me already for 24K for not paying the remainder of a commercial building lease after I went out of business.

1)Will bankruptcy stop them from getting this money?

2) I don’t mind paying them some of the money to be fair. If I paid them 10K and then filed bankruptcy for numerous other bad business debt would the bankruptcy then ask for the 10K back from them?

Here is my response: First of all, thanks for the kind words about my blog. I am glad you found my info helpful.

Secondly, I can only speak to how Georgia law works. California may have different rules. My California based colleagues from the Bankruptcy Law Network – Cathy Moran or Michael Doan – would be better resources for California bankruptcy questions.   While I am gratified to have blog readers from all over the country, I cannot speak to bankruptcy or state law substance and procedure in any state other than Georgia.  In addition, no one should confuse general legal commentary that appears on a blog like this with personal legal advice from a lawyer who has the time to sit down with you to discuss your personal situation.

If Evan was in Georgia, I would respond by saying that, in general, he might be personally responsible for the remainder due on a business lease if :

• the lease was in his name and not in a corporate name
• he personally guaranteed a corporate obligation
• he engaged in fraudulent conduct that would permit the plaintiff lessor to “pierce the corporate veil”

In most of these cases, commercial landlords do require the individual business owner to personally guarantee the lease.  Assuming  that is the case here, a personal bankruptcy would create an automatic stay that would prevent the plaintiff landlord from garnishing wages or bank accounts.

Evan’s second point raises the possibility of a settlement negotiation.  Assuming that there is not a judgment in place that could be immediately turned into a garnishment, Evan may want to approach the landlord with a settlement offer – for example he might propose a settlement of $10,000 in cash with the express or implied threat that if the landlord does not settle, he will file bankruptcy and the landlord will get nothing.

If he did settle for $10,000, then file bankruptcy, that $10,000 might very well be recoverable by the trustee as a preferential payment.

Evan has raised a number of issues, which lead me to the conclusion that his type of situation is one that calls for competent legal advice based on an thorough review of his situation.  Ultimately Evan and his counsel have to decide what are the best possible outcomes here and move in that direction.

My Bankruptcy Law Network collegue Susanne Robicsek answers this question clearly and consisely in a 2007 post on the BLN blog.  Susanne’s advice remains valid – do NOT pay back a personal loan prior to filing bankruptcy without first talking to a bankruptcy lawyer.

There are two potential issues if you pay back mom or dad, or the next door neighbor.  First, there is the problem of “preferences.”   Congress recognized that debtors would be tempted to favor certain creditors in a pre-bankruptcy setting.   The bankruptcy code contains a section that addresses so called “preferential” payments on old debts. A payment to an “insider” – think relative or business partner – is a preference if issued within one year before the bankruptcy filing.  A payment to a non-insider falls within the preference definition if issued within three months.  The only real defense to a preference allegation is the “ordinary course of business” argument, but that is a difficult road, especially in the case of personal loans.

Typically a preference action will be brought by the trustee.  If successful the trustee will be authorized by the bankruptcy judge to compel the recipient of the payment to tender that money to the bankruptcy estate for distribution to creditors.  Needless to say, mom or dad will not be happy to get a letter from your trustee demanding payment of that $5,000 you repaid them 8 months prior to filing.

A second, even more serious issue, can also arise if you pay money to a relative or friend.  Transfers of property prior to bankruptcy that are made to shield your money from creditors may be considered a fraudulent transfer.  This is a much more serious transgression and can result in a denial of your discharge.   The lookback period for a fraudulent transfer per the bankruptcy code is 2 years.

Bottom line: if you think that bankruptcy is even a remote possibility, talk to a bankruptcy lawyer before making any lump sum payments or repayments to anyone.

Because credit card lenders are particularly sensitive to unusual patterns of debt and access to credit shortly before bankruptcy, there is a good chance that this $10,000 new debt in my example would generate an objection and discharge challenge.

One of the Chapter 7 trustees on the panel in the Northern District of Georgia emailed me to note an additional issue.  Remaining with our example, the act of tranferring the $10,000 debt to Citibank would serve as a payoff to Discover.  Under the preference rules, the payment of an antecedent (old) debt to Discover within 3 months of filing would be considered a preferential transfer.  The Chapter 7 trustee would then have the right to demand that the recently paid off creditor – Discover – remit the $10,000 to the trustee for distribution as part of the bankruptcy estate.

In this scenario would the debtor end up facing both a discharge complaint from Citibank because of the new debt and as well as a discharge complaint from Discover since the the $10,000 had to be forfeited to the trustee?

The Chapter 7 trustee who wrote me says that she is not aware of any examples where the paid off creditor (Discover in our example) came after the debtor to recoup its loss.  But such a scenario is certainly possible.

If you are a debtor or debtor’s lawyer and have been faced with this situation, please let me know what happened in your case.

Technorati Tags: credit card balance transfers, preference issues, Chapter 7 trustees, bankruptcy estate

Jonathan Ginsberg responds:  Alice, when someone files bankruptcy, he must list and include all debts, including debts owed to family members. There is no exception for family members.

In fact, if your relative had paid you back within a year of filing, there is a good chance that the bankruptcy trustee would demand that you return the money as a "preference."

If your relative is filing a "repayment plan," it means that he is in a Chapter 13 bankruptcy. Assuming that the loan you made was a "handshake" loan, then your claim would be unsecured. In Chapter 13 case, unsecured debts are paid after priority (taxes, child support) debts and after secured (cars, houses, furniture) debts. You may not get a check from the Chapter 13 trustee for two or three years. You also may not get paid at 100% as many Chapter 13 cases call for less than 100% payouts to unsecured creditors.

When you get the bankruptcy notice, you will see a Proof of Claim form included in the letter. If you want to get paid something, even if you won’t see any money for a few years, you need to fill out this proof of claim and send it to the Clerk of Bankruptcy Court.

Finally, be aware that the automatic stay of bankruptcy prohibits you from trying to collect your money outside the bankruptcy process. You do not, however, have to send this relative Christmas cards or invite him over for dinner!

Technorati Tags: debt owed to family or friends in bankruptcy, proof of claim, unsecured claims in Chapter 13

The last paragraph of Scott's post merits repeating:

The lesson to debtors is, obviously, disclose all of your assets and answer all questions truthfully (truth + fully).  You cannot over-disclose to your lawyer or on the schedules.  For debtors' counsel, explain the criminal and civil (bankruptcy) penalties for false schedules, and get a signed statement that it has been explained.  It can't be good marketing when a client is denied a discharge and gets indicted, especially if the client defends by claiming he/she didn't understand what is supposed to be disclosed.

All of us who represent stressed out and anxious debtors have heard a request that "let's just keep this between the two of us" and a confession about some hidden asset or loan repayment (in cash) to a relative.  My response, as would be the response of most of my colleagues in the consumer bankruptcy bar, is to the effect that (1) I am an officer of the Court and I will not participate in a scheme to mislead the bankruptcy court and (2) I am not going to put my livelihood in jeopardy for any client, ever.  

In the case discussed in Scott's blog entry, the omitted assets would not have created a problem for the debtor, but the judge or trustee in that case sent the file to the U.S. Attorney for criminal prosecution for Bankruptcy Fraud.  Because the debtor intended harm, he committed a crime – and ended up serving time in federal prison.

So, if you are considering bankruptcy, keep in mind this requirement of total and complete disclosure of all information, good, bad or indifferent.

Technorati Tags: bankruptcy disclosure, criminal penalty for bankruptcy fraud, failure to disclose assets in bankruptcy filing

Bankruptcy Code Section 547 empowers the trustee to avoid a transfer (preference) between the debtor and an insider on account of an antecedant (pre-existing) debt if the payment was for a debt incurred within one year of the bankruptcy filing.

Bankruptcy Code Section 548 empowers the trustee to avoid a “fraudulent” transfer to any party within two (2) years of the bankruptcy filing – fraudulent being defined in the Code Section as essentially a transfer made with actual intent to hinder a creditor or for less than full value and made when the debtor was insolvent. Prior to October 17, the lookback period in this section was one year, not two years.

Finally, Bankruptcy Code Section 727 authorizes the Court to deny a discharge to a debtor who, with the intent of defrauding creditors or the estate, has transferred property within one year of filing.

I have a case where my potential client had borrowed assets from an insider to use as security for a bank loan. He never took out the bank loan and therefore never made use of the loan of the assets. When it became obvious that he would not need the bank loan, he then transferred that property back to the insider a year and two months ago.

The insider had requested the return of the assets once it became clear that my client would not need them. The transfer was made when the debtor was insolvent.

Does it make a difference that the debtor’s transfer was in the form of a debt repayment (vs. an outright transfer)? Is there a different standard of review if a “preferential” transfer is outside the preference period but within the fraudulent transfer period? Would this return of assets be considered “ordinary course of business.” Should I list it on Question 10 of the Statement of Financial Affairs?

Thoughts?