here are six important guidelines for staying out of trouble when you’re making these kinds of prebank- ruptcy transactions.
1. Don’t Convert Nonexempt Property If You Own Your Home. as noted above, you risk losing some or all of your homestead exemption if you engage in this type of prebankruptcy planning. our advice is not to do it until you talk to a lawyer.
2. Accurately report all your transactions on Form 7, the statement of Financial affairs. (see Ch. 6 for more on completing the official bankruptcy forms.) if the subject comes up with the trustee, creditors, or the court, freely admit that you tried to arrange your property holdings before filing for bankruptcy so that you could better get a fresh start. Courts see frankness about your prebankruptcy activities as a sign of honorable intentions. if you lie or attempt to conceal what you did or why you did it, the bankruptcy trustee or court may conclude that you had fraudulent intentions and either not allow the transaction or—even worse—deny you a bankruptcy discharge.
3. Sell and buy for equivalent value. if you sell a
$500 nonexempt item and purchase an exempt item obviously worth $500, you shouldn’t have a problem. if, however, you sell a $500 nonexempt item and purchase a $100 exempt item, be prepared to account for the $400 difference.
otherwise, the court will probably assume that you’re trying to cheat your creditors and either force you to cough up the $400 (if you still have it) or, possibly, dismiss your bankruptcy case.
4. Sell and buy property at reasonable prices. when you sell nonexempt property in order to purchase exempt property, make the price as close to the item’s market value as possible. this is especially true if you sell to a friend or relative. if you sell your brother a $900 stereo system for $100, a creditor or the trustee may cry foul, and the judge may agree.
at the other end of the transaction, if you pay a friend or relative significantly more for exempt property than it is apparently worth, the court may suspect that you’re just trying to transfer your assets to relatives to avoid creditors.
5. Don’t make last-minute transfers or purchases. the longer you can wait to file for bankruptcy after making these kinds of property transfers, the less likely the judge is to disapprove. For example, judges frequently rule that a hasty transaction on the eve of filing shows an intent to cheat creditors. the open, deliberate, and advance
planning of property sales and purchases, however, is usually considered evidence that you didn’t intend to defraud. But even this isn’t foolproof. one court ruled that the debtor’s deliberate planning more than a year before filing was evidence of an intent to cheat creditors. this conflict reinforces our earlier warning: you must find out your bankruptcy court’s approach before you sell nonexempt property.
6. Don’t just change the form of property ownership.
simply changing the way property is held from a nonexempt form to an exempt form is usually considered fraudulent.
ExAMPLE: although he’s married, jeff owns a house as his separate property. also, jeff incurred virtually all of his debts alone, so he plans to file for bankruptcy alone. in jeff’s state, the homestead exemption is only $7,500. jeff’s equity in his home is nearly $30,000. jeff’s state also exempts property held as tenancy by the entirety, so jeff transfers ownership of the house to himself and his wife as tenants by the entirety. that would normally exempt the house from all debts jeff incurred separately. But because jeff merely changed the form of property ownership, rather than buying exempt property or paying off debts to give himself a fresh start, the bankruptcy court would probably find the transfer fraudulent and take jeff’s house. (jeff might get
$7,500 from the sale as his homestead exemption, but not necessarily.)
Community property warning. As mentioned earlier, if you’re married and live in a community property state (Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin), the trustee can usually take both your share of community property and your spouse’s, even if your spouse doesn’t file for bankruptcy. But if you’re tempted to change all or a portion of the community property into your spouse’s separate property, beware: Creditors or the trustee are apt to cry fraud, and the trustee is likely to take the property anyway.
CHAPTER 3: YOUR PROPERTY AND BANKRUPTCY 65
to give you an idea of what judges consider
improper behavior shortly before filing for bankruptcy, here are some transactions that courts have found to be fraudulent:
• a debtor bought goods on credit but never paid for them. he then sold those goods and bought property that he tried to exempt.
• a debtor with nonexempt property was forced into involuntary bankruptcy by a creditor. the debtor convinced the creditor to drop the forced bankruptcy. then the debtor sold the nonexempt property, purchased exempt property, and filed for Chapter 7 bankruptcy.
• a debtor sold nonexempt property that was worth enough to pay off all her debts (but didn’t pay them off).
• a debtor sold nonexempt items for amounts well below what they were worth.
• a debtor sold valuable property to a nonfiling spouse for one dollar.
• a debtor transferred nonexempt property the day after a creditor won a lawsuit against him, then filed for bankruptcy.
• a debtor in a state with an “unlimited” homestead exemption sold all her nonexempt property and used the proceeds to pay off a large portion of her mortgage.
• a debtor bought a piano and harpsichord and a whole life insurance policy, all exempt in his state. he didn’t play either instrument, and he had no dependents who needed insurance protection.
Taking Out Loans to Pay Nondischargeable Debts Some people are tempted to borrow money to discharge debts that aren’t dischargeable—for instance, a student loan—and then list the new loan as a dischargeable unsecured debt. Be careful if you do this. A court could consider your actions fraudulent and dismiss your bankruptcy. If the court doesn’t dismiss your case, the creditor may ask the court to declare the debt nondischargeable. If you take out the loan while you’re broke and file for bankruptcy soon after, you probably will be penalized. And, if you borrow money or use your credit card to pay off a nondischargeable tax debt, you will not be able to discharge the loan or credit card charge in a Chapter 7 bankruptcy (although you could in a Chapter 13 bankruptcy).(11 U.S.C.
§ 523(a)(14).)
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C H A P T E R
4
Your House
How Bankruptcy Affects a Typical Homeowner ...68 Mortgage Payments ...68 Liens on Your House ...69 Keeping Your House ...69 If You’re Behind on Your Mortgage Payments ...70 Negotiating With the Lender ...70 Mortgage Workouts ...71 If the Lender Starts to Foreclose ...71 Defenses to Foreclosure ...72 If Foreclosure Is Unavoidable ...72 Will You Lose Your Home? ...73 Ways to Prevent the Loss of Your House ...82 Reduce Your Equity Before Filing for Bankruptcy ...82 If You File for Bankruptcy ...83
I
f you own a home, Chapter 7 bankruptcy may not be the best strategy to deal with your debts. Before you decide to file, you must be aware of two important points:• Chapter 7 bankruptcy won’t ultimately prevent a foreclosure on a mortgage or deed of trust, although the automatic stay (see Ch. 2) will put it on hold while your bankruptcy case is pending (unless the creditor gets the judge to authorize the foreclosure). if you want to keep your home, you must keep making your mortgage payments before, during, and after bankruptcy. if you’ve already missed mortgage payments, you’ll have to make them up to prevent foreclosure. (see
“if you’re Behind on your Mortgage Payments,”
below.)
• if you have nonexempt equity in your home (that is, equity that isn’t protected by a homestead or other exemption), you risk losing your home if you file for Chapter 7 bankruptcy—assuming the amount of equity will cover the costs of sale and then some.
(real estate exemptions are discussed in “will you lose your home?” below.)
Chapter 13 bankruptcy provides many opportunities for saving a home that are unavailable to a Chapter 7 filer. For more information, see Chapter 13 Bankruptcy:
Repay Your Debts, by stephen elias and robin leonard (nolo).
this chapter explains how filing for Chapter 7 bankruptcy—or pursuing alternative strategies—affects your ability to hold on to your home. of course, your home isn’t your only consideration in deciding whether or not to file for bankruptcy, so make sure to read Ch. 1 of this book before making the decision.
if you’re still uncertain about what to do after reading these chapters, see a bankruptcy lawyer. if your home is important to you, it’s worth spending some extra money to get some professional help.
Be aware of the following:
• The procedures and strategies discussed in this chapter can be complex. We recommend you talk to a bankruptcy lawyer before filing. A mistake in estimating your equity or applying a homestead exemption could cost you your home.
• We offer this information to make you aware of several options that may be available to you. Your state’s laws may give you additional rights that are not listed here.
• If you own two homes, or you want to protect equity in a home that is not your residence, a consultation with a bankruptcy lawyer is a must.
• The rules for how community property and “tenancy by the entirety” ownership is treated in bankruptcy can get complex when only one spouse files. If you are married, own your home, and plan on filing alone, see a bankruptcy lawyer first.