Timing matters in bankruptcy. For example, if you have seasonal fluctuations in income (like teachers and realtors), then at some times of year your income may be too high to qualify for bankruptcy. But, if you wait a few months, your low-season income may qualify you.
Similarly, the timing of certain transactions can impact whether it’s a good idea to file bankruptcy. Specially, if you’ve just received an inheritance, sold real estate or transferred property to friends or family, you’re likely best off waiting a year or two file bankruptcy. Why?
Bankruptcy Basics
In bankruptcy, everything you own and owe is legally transferred to a Bankruptcy Trustee, who has the legal right to sell your assets to pay your debts. You’re allowed to keep $300,000-$600,000 in equity in a house or approximately $28,000 in assets that you chose. But, after that, your assets belong to the Trustee until the bankruptcy is completed. A good attorney won’t let you go through bankruptcy if it looks like you’ll lose assets. The point is to protect what you’re legally allowed to keep, and end up with nothing of real value for the Trustee to liquidate to settle your debts. In such a bankruptcy, your debts end up “discharged” or wiped out.
However, if any of the following transactions occur in the 1-2 years prior to filing bankruptcy, then they could negate the benefit of bankruptcy:
Repaying Loan to An “Insider”
Friends and family members are considered “preferential” in bankruptcy law. That means the law believes there is a likelihood you could benefit financially from repayments or transfers of money to friends and family. How? Perhaps the value of your assets is close to the $28,000 you are allowed to keep and that investment account with $5,000 will put you over the maximum. You transfer ownership of the account to your Uncle Fester to hold onto until after bankruptcy. That’s considered fraudulent and a preferential transfer. If discovered, your bankruptcy will be voided (and all your debts reinstated) and the Trustee will sue Uncle Fester for the investment account and win. Same goes for the transfer of any property more than $600 (cars, computer, Grandma’s jewelry) in the year before you file bankruptcy.
Implication? If you’ve given something worth more than $600, or repaid a debt of more than $600 to a friend or family member, you need to wait at least a year to file bankruptcy.
Transferring Real Estate At Less Than Market Price
Let’s say you have a piece of land worth $100,000. If you sell it for about $100,000 just before filing bankruptcy, then the Trustee will have no problem with this. However, if you give your son a special price on that land – anything less than about $90,000 – the Trustee will claim this was fraud. Why? You took less than you could have gotten for the land and thereby cheated creditors out of repayment that could have occurred had you gotten market price for the land. You made all creditors worse off by selling the land to your son. The Trustee will claim that this was a preferential transfer, take the land back, and sell it instead to someone willing to pay close to its actual value.
Implication? Don’t transfer real property – either title or deed – in the two years prior to filing bankruptcy unless you get market price for it.
Soon-to-Be Inheritance
If you have a loved one at death’s door (ghoulish to think about, I know, but this can be financially important), and expect to receive more than about $28,000 (the limit of assets you can keep through bankruptcy before the Trustee starts taking/selling property in excess of that amount), then my advice usually is to postpone bankruptcy. Under bankruptcy law, any inheritance received within 6 months of filing a bankruptcy petition belongs to the bankruptcy estate, and thus the Trustee can (and will) take it.
Implication? Spend that inheritance until you have less than $28,000, and then file for bankruptcy.
Discharging Tax Debt in Bankruptcy
Many people don’t know this, but most kinds of state and federal tax debt can be eliminated in bankruptcy (the exceptions are payroll taxes and any taxes where you didn’t file a timely tax return). However, the tax debt needs to be three years old to be dischargeable in bankruptcy and is subject to some other, very picky timing issues.
Implication? Timing really, REALLY matters if you’re trying to get rid of tax debt with bankruptcy. Make sure you’re talking to a bankruptcy attorney who really knows how to get rid of taxes in bankruptcy – many don’t!
“Hiding” Your Money In Your Kid’s Account
This isn’t so much a timing issue, but it’s another fine point many people considering bankruptcy ask me about. If you’re anticipating filing for bankruptcy, can you put some of your assets in your child’s name to protect it from the Bankruptcy Trustee? In general, no. You cannot hide money by putting it into an account under your minor child’s name. The Trustee can and will look any accounts belonging to children (using their social security numbers from your tax returns) for up to four years prior to filing bankruptcy. If the Trustee finds your assets in your child’s name s/he will claw it back and use it to pay your debts.
But, with respect to your children, here’s what you can do. You can repay loans you took from a minor child. You can also pay tuition for your child, or any other “fee for service” such as music lessons.
Implication? You may pay for your child’s regular, on-going health, education and welfare. It’s just not okay to “hide” your money in a child’s account.
Deposits to a Child’s College 529 Savings Account
What about deposits made to your children’s 529 savings accounts? Money deposited in 529 accounts for up to one year before filing bankruptcy can and will be clawed back by the Trustee. The reasoning is that you shouldn’t enrich your children’s future at the expense of your creditor’s present – you should be paying your bills, not saving for your child’s college tuition.
Implication? If you’ve put lots of money into your children’s 529 college accounts recently, then it’s best to postpone filing bankruptcy for a year.
Conclusion
There’s an “art” to the timing of bankruptcy. By waiting a few months to two years, you may save an important asset. A good bankruptcy attorney knows this and will want to discuss all the particulars of your finances, to be able to guide you appropriately. Moreover, it is never too early to speak to someone about bankruptcy, because you may have some issues that require you to wait a year or two before filing.
May 20, 2021