Senior seeks Chapter 7 relief for $5K debt
THERE are clients who received a large amount of cash before they file for bankruptcy. They may have received cash from a refinance of their residence with net cash out, obtained a business loan, or sold an asset. These, and similar type of transactions, generate cash for clients which have been used up, and somewhere along the line, something goes wrong, and they decide that they need bankruptcy relief from debt. Bankruptcy trustees generally watch out for these kinds of transactions because they may be able to get some of the money back as preferential transfers. The bankruptcy code provides for a look back period of 90 days pre-filing for consumer debtors (not business) for amounts over $600 paid to ordinary creditors, 12 months paid to creditors who are insiders, and transfers of assets absolutely or by way of security other than in the ordinary course of business made 24 months before the bankruptcy petition is filed. Some trustees have a look back period of 48 months because the California Civil Code has this period of look back for transfers that defraud creditors, assuming other factors such as transfers for less than fair market value are present that possibly makes the transfer avoidable.
In all of these situations, the best defense is documentary evidence that proves that the money was used for the right reasons. For instance, if you cashed out $100K when you refinanced your house 10 months ago and you don’t have that money anymore, you must be able to explain how the money was used, and more importantly, you must have the documentary evidence to prove that your explanation is true and correct. Let’s say that your explanation of how the $100K was used is as follows: 1) $20K was used to get a new roof 2) $30K was sent abroad to pay for the medical expenses of your father who lived abroad and did not have medical insurance 3) $20K was used as a down payment to buy your retirement condo with a mortgage of $80K 4) $20K was invested in a business, which is now defunct 5) $10K was used to pay the college tuition of your son. This accounts for $100K. It’s well and good that you testify at the hearing that the $100K was used that way. Even though your testimony is under penalty of perjury, you need to corroborate your testimony with hard evidence. Hard evidence consists of documents that prove what you are saying. To prove that your net cash out was $100K, you must provide the escrow papers. Contract with the roof repair company, copies of the medical bills of your father and the wire transfers sending the money, copies of the mortgage for the condo abroad, an internet assessment of the market value of the condo abroad, copy of the check that paid the $20K business investment, and copies of the college tuition fees statement. Copies of the checks covering the payments made must also be provided. Without hard evidence, the trustee does not have enough basis to believe what you are saying and may be inclined to dismiss your case for lack of evidence to prove dissipation of assets. I had a recent case where debtor owned a business with a lot of inventory destroyed by fire. Debtor received an insurance payment of $175K but could not provide hard evidence of how the money was used up. He testified that the money was used to pay back salaries and to restart the business but could not provide any more evidence to corroborate his testimony. Case was dismissed.
So, don’t throw away your hard evidence. Gather them and compile them into an easily readable format so that in case you have to file for bankruptcy relief, you have a bulletproof defense to justify the fact that you used the cash legitimately.
On another note, 68-year old senior tells me that he wants to file a Chapter 7 case for $5K of credit card debt. I was taken aback because he only owed $5K. I asked him why he wanted a bankruptcy for $5K of credit card debt. He said his social security is $1000. He lives with his daughter but pays her $500 of rent, leaving him with $500, which he uses for gas, car insurance and his credit cards. He says he pays $150 a month to keep the $5K current, and he’s been paying it for 20 years! He said he’s just tired of paying for it and just doesn’t want to pay it anymore. So, at 68 he wants a fresh start without debt, even if its $5K. The amount of debt owed becomes a burden depending on how much your income is. The best situation is where you don’t owe any short term or credit card debt. Long-term debt for the purchase of a house is good because the house normally increases in value over time. This means that you’re not wasting your money. And in the meantime, you have a nice house to live in and raise a family. After paying the house for 20 years, barring a major catastrophe in the economy, the value of the house will probably double or triple if its in the right location. So you can look at a house as a safe investment over the long run. Hence your house payments are not wasted. But with credit card payments, you’re basically throwing your money away. Even if it took client 20 years to figure out that he was wasting his $150 monthly payment on the $5K credit card debt, he finally realized that he threw away $36K to keep $5K of credit card current. It’s never too late to get rid of your debt. But getting rid of your debt is the right thing to do at any age. My oldest client was 92 and he still opted for Chapter 7 to get rid of $20K of credit card debt. He migrated here 70 years ago to work in the pineapple plantations in Hawaii. I don’t know how he keeps young, but at 92, he looked about 60 and his wife is only 38. He said his plumbing still works well. Enough said.
“This is the message which we have heard from Him and declare to you, that God is light and in Him is no darkness at all.” –1 John 1:5.
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Lawrence Bautista Yang specializes in bankruptcy, business, real estate and civil litigation and has successfully represented more than five thousand clients in California. Please call Angie, Barbara or Jess at (626) 284-1142 for an appointment at 1000 S. Fremont Ave, Mailstop 58, Building A-1 Suite 1125, Alhambra, CA 91803.