The holiday season is upon us, a time for sharing meals with friends, family and loved ones, and for some, exchanging expensive gifts. But debtors beware: Consumers who enter into bankruptcy proceedings in the next six months may end up turning over any cash or gifts they receive to their creditors, and big gifts could even affect what kinds of bankruptcy people are eligible to file.
The bad news, right off the bat: When filing for any form of personal bankruptcy, the court will tally all your assets, as well as figuring out your average income over the previous six months. While gifts obviously count as assets, they can also be considered income and bump up what you’re ultimately expected to pay out to creditors.
“If you’re going to receive a gift prior to filing, like a Christmas gift, or a family member gives a gift of money to help you meet some expense, that money or property you receive is going to be considered an asset of the bankruptcy estate,” says James R. Meizanis, a bankruptcy attorney with the firm Tully Rinckey. “It’s going to be subject to liquidation if it’s not exempt.”
On top of the unenviable prospect of turning a nice wad of cash or shiny new computer directly over to a creditor, a bump in average monthly income caused by a gift could prevent people from filing Chapter 7 bankruptcy, which liquidates most of the filer’s assets to pay off debts and then wipes the slate clean (except for student loans, taxes, child support and certain other debts). “It can play a big part in terms of your eligibility,” Meizanis says. “If you receive a substantial gift it can push you over the income limit.”
In that case, the debtor may have to instead file a Chapter 13 bankruptcy, which creates a payment plan to pay off debts in lieu of discharging them. Additionally, filers who report a higher average monthly income because of a gift will be expected to put a greater amount of money toward their payment plan each month, even though the gift is probably not recurring.
File Before Christmas and Birthdays
James R. Meizanis
The good news is consumers who have already filed their bankruptcies probably don’t have to worry about the consequences of getting presents, with certain exceptions. “We’re looking at what assets you have or are entitled to on the date of filing,” says Meizanis. “We wouldn’t be looking at making any kind of amendments or run into any troubles with the trustee or the court on that issue.”
Note that technically, it’s not really kosher to request that someone hold off on giving a specific gift until after the filing is complete — to make an honest filing you would need to not know that the gift was on the way. “If you are expecting to receive a gift in the future, it all comes down to whether you’re entitled to receive that gift at the time of filing,” the attorney explains. “If you didn’t know about it, and didn’t have any way to have a claim on it, that would not be an asset of the bankruptcy estate.”
There are three major windfall exceptions that do have to be declared to the bankruptcy trustee and could affect the filing if they occur up to six months afterward: Money or property from an inheritance, a property settlement such as a divorce and the proceeds of life insurance.
Additionally, in certain districts receiving a large gift outside those criteria after filing bankruptcy could be subject to disclosure to the bankruptcy trustee for Chapter 13 cases. The bottom line: Make sure you are honest and upfront with your attorney regarding gifts and windfalls so you don’t accidentally hide your assets and potentially subject yourself to penalties.