What actions must a creditor take in a bankruptcy case?

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What actions must a creditor take in a bankruptcy case?

The most common participation by a creditor in a consumer bankruptcy case is to file a proof of claim and share in the liquidation of the bankruptcy estate or under a proposed plan. The bankruptcy estate is overseen by the trustee who distributes the bankruptcy estate to the creditors after deducting trustee expenses, administrative costs, and paying priority claims, such as those made by the government. In most Chapter 7 bankruptcies there are few or no assets in the bankruptcy estate.

A proof of claim that is properly filed in accordance with the rules governing bankruptcy cases is evidence of the claim’s validity and amount and is deemed allowed unless the debtor or an interested third party objects. Unsecured creditors will not receive a distribution from the bankruptcy estate unless a proper proof of claim has been filed. The proof of claim must be filed within 90 days of the date when the meeting of creditors was first set (not including any continuances).

(Reviewed 11.3.08)

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Will the Uniform Transfers to Minors Act help me provide for my children?

uniform transfer to minors consumer bankruptcy

Will the Uniform Transfers to Minors Act help me provide for my children?

Money held in trust for someone else is not property of the estate. Let’s say you setup a Uniform Transfers to Minors Act (UTMA) “custodianship” in the form a bank account. Because you cannot revoke the custodianship, any money you deposit to the UTMA account is not your property. Your payments might nonetheless be found to be fraudulent transfers if they were made with an intention to hinder, delay or defraud your creditors or at a time when you were insolvent.

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Can I pay some debts outside of bankruptcy?

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Can I pay some debts outside of bankruptcy?

This is a tricky question. First, some payments that you make before you file might backfire. The trustee is permitted to set aside certain prepetition payments as preferences. When this happens the trustee often sends a letter to the creditor and asks for the money. If the creditor refuses to hand it over, the trustee can sue the creditor to recover it. This money becomes part of the bankruptcy estate and can be distributed to other creditors unless you have an exemption to cover it. Second, after you file your petition, you can pay whomever you like, but it seldom makes sense unless there is a bankruptcy reason to do so. In a Chapter 13 bankruptcy, your plan may include some payments that are “outside” of the plan. This doesn’t technically mean that the payments are outside of the bankruptcy. What it means is that you will make the payments directly to the creditor instead of paying the money through the trustee. This arrangement makes sense, for example, in situations where the trustee is not timely in paying your mortgage and you want to pay it directly to the mortgage company to make sure you do not end up with late payment marks on your credit report. Another reason to pay a debt “outside” of the bankruptcy is that the debt arose after you filed. Chapter 13 bankruptcy imposes strict limits on new credit, but some debts, like medical bills, are unavoidable. These debts survive bankruptcy and you should pay them.

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Do I have to pay taxes during my bankruptcy case?

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Do I have to pay taxes during my bankruptcy case?

The tax obligations of the person filing a bankruptcy petition vary depending on whether you file a Chapter 7 bankruptcy or Chapter 13 bankruptcy.

The filing of a Chapter 7 bankruptcy petition creates a separate taxable bankruptcy estate, consisting of property that belongs to you before the filing date, and is completely separate from you as an individual taxpayer. The trustee is responsible for preparing and filing the estate’s tax returns (Form 1041) and paying its taxes. The individual debtor remains responsible for filing returns (Form 1040) and paying taxes on any income that does not belong to the estate.

The filing of a Chapter 13 bankruptcy petition does not create a separate taxable estate for federal tax purposes. You file the same federal income tax return (Form 1040) that was filed prior to the bankruptcy petition. If you run into trouble paying your post-petition taxes, look into negotiating an agreement with the tax man.

You must pay local property taxes otherwise it will probably constitute a default on your home mortgage.

(Reviewed 11.14.08)

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What does it mean to avoid a lien?

avoid a lien consumer bankruptcy

What does it mean to avoid a lien?

When you “avoid” a lien, you obtain a judicial determination that the lien no longer encumbers a piece of property.

For example, suppose that you own Blackacre, your ancestral estate. It is presently worth $300,000, subject to a first mortgage of $180,000. Suppose that someone obtains a judgment against you for $30,000 and then obtains a lien against Blackacre. They are planning to force a sale of Blackacre in order to recover their $30,000, or else they’re planning on camping out at your next refinancing or sale in order to skim $30,000 off the top of whatever money you receive after the mortgage is discharged. Now you file bankruptcy, and let’s suppose that your state law provides a $200,000 homestead exemption. The judgment lien impairs that exemption (makes it less worthwhile). Therefore, the Bankruptcy code allows you to avoid the lien, which means you will emerge from bankruptcy with Blackacre free and clear of that lien. However, the mortgage lien still exists because the Bankruptcy Code does not let you avoid voluntary or nonjudicial liens.

(Reviewed 11.14.08)

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Can I stay in my apartment?

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Can I stay in my apartment?

Practically speaking, so long as you are current in your rent payments, you can continue to occupy an apartment as provided by the lease or by the common law of landlord-tenant relations. This may not be true if the lease has been terminated prior to bankruptcy. For a discussion on the effect of an automatic stay on a residential lease, click here.

Strictly speaking, an unexpired lease is an asset of your bankruptcy estate that usually has no value and that a Chapter 7 trustee would normally “reject.” Rejection is a technical breach of the lease that would allow the landlord to evict you. If you are worried about this happening, ask the trustee to formally “abandon” the lease so that you can formally affirm it.

(Reviewed 11.14.08)

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I’m a creditor in a bankruptcy case, and the debtor appears to have given some of his assets to relatives in order to keep them away from his creditors. What can I do?

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I’m a creditor in a bankruptcy case, and the debtor appears to have given some of his assets to relatives in order to keep them away from his creditors. What can I do?

First, you can make the trustee aware of the situation. The debtor is required to disclose transfers of property made within the previous year on a form called the Statement of Financial Affairs. If the debtor did not do so, the judge might dismiss the case. In any event, this type of transfer is called a fraudulent transfer. The Bankruptcy Code gives the trustee the power to avoid transfers made within 2 years of the bankruptcy if the debtor made the transfer with the intent to hinder creditors, got little or nothing in return for the property, was insolvent when he made the transfer, or made the transfer to a business associate or a relative, among other reasons. The trustee can also sue to recover the property under state law.
Second, if the trustee declines to pursue the property, you could try to recover the property yourself under state law. Because the property is technically an asset of the bankruptcy estate, you would need to file a motion to lift the automatic stay in order to file suit in state court. You will probably also want an order abandoning any claim in the property to you. Otherwise whatever property you collected would have to be shared with the other creditors. While you could get a bigger share for doing the work, it still might not be worth the effort.

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A relative died after my case was filed. What happens to the life insurance proceeds?

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A relative died after my case was filed. What happens to the life insurance proceeds?

An inheritance or life insurance payment you receive within 180 days after filing is part of the bankruptcy estate. If you chose the federal exemptions when you filed, life insurance on someone you depended on for support would be exempt to the extent reasonably necessary for your support and the support of your dependents. If you chose your state’s exemptions (or if your state doesn’t allow someone to choose between federal and state exemptions), you may find that life insurance proceeds are fully or partially exempt.

(Reviewed 11.14.08)

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My spouse is declaring bankruptcy. Should he file alone or should we file together?

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My spouse is declaring bankruptcy. Should he file alone or should we file together?

Whether married couples should file a joint petition or a single one depends on various factors: type of property, the amount of community debt involved, and how the property is held (e.g., community, joint tenancy, or tenancy by the entirety). One factor is that a co-debtor may receive a stay even if the other debtor cannot get a stay

Filing together eliminates the separate debts of you and your spouse and all the jointly-held marital debts. Filing alone leaves the non-bankrupt spouse still liable for his or her share of joint debts, but wipes out the spouse’s separate debts and his/her share of the joint debts.

If you are legally separated, have divided your property, and taken care of all the financial considerations, your best option may be to have your spouse go it alone. If all the debts were incurred before you were married, there is no point in having you both file.

Community property and common law (also called “equitable distribution”) are the two types of martial property ownership. The vast majority of states apply the equitable distribution rules; nine states apply the community property rules. If you live in a common law property state, your spouse’s bankrupt estate will include his/her separate property and half of the jointly-held marital property. The non-bankrupt spouse will not have to worry about the effects of the bankruptcy on his or her separate property.

However, the bankruptcy court takes a dim view if the non-bankrupt spouse is merely holding the property or has received the property from the bankrupt spouse within one year of filing bankruptcy. In this case, this transaction is considered fraudulent, and the property will be turned over to the bankruptcy trustee.

In community property states, spouses equally own all property earned or received during the marriage, splitting 50-50. In bankruptcy, then, all the community property you and your spouse own jointly is part of the bankruptcy estate, regardless whether you join in the filing. Your separate property — property you owned before the marriage — is not effected by your spouse’s bankruptcy. Property held by your spouse will be used to settle debt first, and then non-exempt community property will be used.

Do no rely solely on general explanations of the rights and liabilities of married persons in your bankruptcy planning. The normal rules may not apply, or they may apply in modified form, in a bankruptcy case. To give one example out of many, creditors of one spouse cannot ordinarily dispossess the other spouse from property they hold as tenants by the entirety. But a bankruptcy trustee may be able to.

(Reviewed 11.14.08)

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