Restrictions During Bankruptcy

Bankruptcy can be a big disruption to your life. One of the hardest things to face is the restrictions that you might face when you are in the process of repayment or debt settlement. It can be hard to know if you’re allowed to accept a financial gift from a friend, or if it’s okay for a family member to purchase a plane ticket for you to travel. Before you do anything like accept a financial gift or loan, make sure you speak with your bankruptcy attorney. They will be able to advise you on what will or won’t effect your bankruptcy.

Borrowing from Friends and Family

When seeking financial aid, it’s natural for people to turn to friends and family before they turn to a bank. But if financial difficulties lead to filing for bankruptcy protection, you’ll want to make sure that the friends and family you borrowed from are going to be protected.

The first question you’ll get is if you signed a promissory note. This is a written and signed promise to pay a stated sum to a specific person at either a specified date or on demand. The note must include information that identifies the borrower and the lender, and should also specify the amount that was borrowed, the terms of repayment, and the consequences for not paying the loan.

If you signed a promissory note, the money you received from your friend or family member will be formally treated as a loan. If there is no note, then the money can be treated as a gift. It’s important to remember that gifts are assets.

For example, if your rich aunt gives you $1 million house and puts the title in your name, it is an asset, and therefore will be considered when you file for bankruptcy as such.

Loans

If the money you received from your friend or family member has a promissory note, and is thus considered a loan, you will need to list this lender as a creditor in your bankruptcy. They will be entitled to repayment in the exact way that any other creditor is.

Types of Bankruptcy

Before you file for bankruptcy, it’s important to know what bankruptcy options exist for you.

Chapter 13

Chapter 13 bankruptcy is designed to allow you to keep all of your property, but is also determined by your property. The amount of your nonexempt property affects how much unsecured creditors get paid during your bankruptcy process. And to avoid foreclosure or repossession, you still need to keep up with the payments you make for you secured debt, such as mortgages or car loans.

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Chapter 7

When you file a Chapter 7 bankruptcy, almost all of your assets and property are liquidated and thus become property of the bankruptcy estate that is sold to allow you to repay your debts. There are some exceptions to this though.

During your Chapter 7 bankruptcy, a bankruptcy trustee is appointed and given the authority to sell your assets so that you are able to pay your creditors.  Just because your assets are being sold, that does not mean that all of your property needs to be sold.

Chapter 11 Bankruptcy

Under Chapter 11 bankruptcy, the business or individual undergoes a reorganization in order to pay down its debt and reorganize its income and expenses while regaining its profits.  If your business is a corporation, limited liability company (LLC) or partnership, it can continue business operations during the bankruptcy process. While the business is making payments through the debt repayment plan, the business continues operating.

The Chapter 11 bankruptcy process can be a complex, and lengthy one. If you are facing a Chapter 11, you’ll want to work with a bankruptcy attorney to understand the process and what you will need to do to move through it.  They will be able to explain the terminology in addition to what is legal, and what you will be required to do.

Typically consumers file under Chapter 7 or Chapter 13. There are a number of exceptions in each that allow you to protect your property so that you have something to start over with after you exit bankruptcy. Some common exemptions include: equity in your home and car, jewelry up to a certain dollar amount, household items, clothing, and most retirement funds.

In Chapter 7 your assets are liquidated to pay back creditors. The remainder of your assets that are not protected under exemptions are sold to pay creditors. And all creditors receive a proportional payment once those assets are sold. For example, if you owe your Mom 5% of your debts, she will receive 5% of the proceeds from the sale of your assets.

In Chapter 13, a court uses your disposable income to pay back creditors for 3 to 5 years. Disposable income is determined by taking your income and subtracting state-set and national-set standards for living expenses. You will provide the court with your disposable income and the court will distribute the amount proportionally among creditors.

Gifts During Bankruptcy

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While money you have been loaned from friends and family can be considered a gift, you will still need to disclose the amount on your bankruptcy schedules. This also is the case if you are the one that gifted the money.  Depending on the state you file in, you might be required to disclose the amount you gave on your bankruptcy schedules if it’s over a certain dollar amount.

The timing of your bankruptcy filing determines what happens to the gift. If the gift was received prior to filing, a court will take it into account when determining the amount you need to pay creditors. But if the gift was received after filing for Chapter 7, it will not be included in the bankruptcy proceeding.

For Chapter 13, it will depend on your specifics. If the gift was received before filing, you might be expected to pay more money to your creditors. If you receive the gift between the date of filing and the date the repayment plan is confirmed, your trustee might view that gift as disposable income, which means you will be able to pay more to your creditors. If the gift is received after the repayment plan has been confirmed, you’ll probably be able to keep the gift without having to increase the payments to creditors.

If the gifts are significant amounts, a trustee might be able to claim that money and make you repay your creditors with it. This is why it’s important to be smart about gifts you receive during bankruptcy. A bankruptcy court’s main objective is to keep creditors at bay. A bankruptcy trustee has the right to take back property or money that the debtor improperly gave away before filing in what is termed as a “clawback.”

Clawback

A clawback can be triggered for a number of reasons, including something as small as giving cash to a relative for their birthday. These can also be deemed “fraudulent transfers.” You can also trigger a clawback if you repay a loan from a friend or family (either with or without a promissory note) before filing for bankruptcy. This is called a “preferential payment.” What this means is that you chose to repay a creditor over another creditor (remember, they are all viewed as “creditors,” regardless of their relationship to you).  A bankruptcy court’s job is to ensure all creditors are treated equally during the bankruptcy process.

Fraudulent Transfers

When a court deems a transfer of money a “fraudulent transfer,”they will need to recover the money as an asset that can be used for bankruptcy purposes. This can be a very costly mistake, and if a court finds the fraudulent transfer was done to intentionally shield the asset from bankruptcy, a court can stop the bankruptcy so that a debtor is not able to disclose their debts.

Because of the laws regarding gifts and loans, it’s important that you consult a bankruptcy attorney before you give any money to anyone during a bankruptcy. If you have not yet filed for bankruptcy, but are considering it, you should speak with an attorney before accepting any loans or gifts from family members.

Working with a Bankruptcy Attorney

Bankruptcy law can be hard to understand. As you can see, there are a number of restrictions when it comes to filing bankruptcies. Because of this, it’s highly advised that you work with a bankruptcy attorney that can walk you through the process and clarify any questions or concerns you might have. A bankruptcy attorney might also be able to prescribe options that keep you out of having to declare bankruptcy in the first place. There can be a lot of questions during this extremely stressful time. Let the lawyers at Simon Resnik Hayes LLP walk you through the process so you can achieve the best outcome possible. 

Simon Resnik Hayes LLP

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