When we think of bankruptcy we generally think of two things: eliminating debt and fear of losing our stuff. And while eliminating debt and trying to keep your stuff are important parts of the bankruptcy process, it is important to understand that much more needs to be disclosed. The financial dealings in your life over the past two years are going to come under a magnifying glass and open to some scrutiny. If truth be told, it is your prior financial transactions that keep bankruptcy lawyers up at night, not what kind of debt you have or what assets you keep.
Here are some of the transactions you will be required to disclose in your bankruptcy case and why the bankruptcy court wants to know about them:
Transfers of Assets: This is the big one (at least in my opinion). You will be required to disclose any transfers of assets that occurred in the last two years before your bankruptcy filings. The transfer of an asset basically means any asset you gave away or sold to a third party. The thinking behind requiring people to disclose this information makes sense. They don’t want people transferring all of the assets to their brother, filing for bankruptcy and claiming that they don’t own anything, and then getting their stuff back down the road (not that any of you would ever think of doing such a thing:)).
You are required to disclose these transactions because if you did such a thing like give away your stuff prior to filing, the bankruptcy court can actually go to the person you gave it to and ask for it back. And they don’t ask nicely. It can involve “asking” by serving your family member with a federal lawsuit and demanding the stuff back. Which is awkward for everyone involved (except for the court, they don’t really care).
The tough thing with this requirement is that it snags up a bunch of transfers that were done totally innocently. The most common one I see is the parents who give their older children cars as they head off to college. If the kid doesn’t pay for the car then technically it is a transfer for no value and the bankruptcy trustee can seek to undo that transfer – or more commonly what happens is the trustee asks the parents who are in bankruptcy to pay the value of the car to bankruptcy court for the benefit of their creditors. This means coming up with money you often don’t have to protect your kid.
Payments to Creditors Totaling More than $600: You will be required to disclose any creditor to whom you paid more than $600 to in the 90 prior to your bankruptcy filing – and any payments of more than $600 to any family members in the last year. The reason behind this is because the bankruptcy trustee is trying to figure out if there have been any preferential payments. In order to understand what a “preference” is you have to understand the big picture behind bankruptcy. In your bankruptcy documents your creditors are broken down into three groups: secured creditors (mortgage, car loan), unsecured priority creditors (taxes, child support), and general unsecured creditors (credit cards, medical bills). The idea is that the creditors in each of these groups will be treated equally. So for instance, if there is money to be distributed to the general unsecured creditors, they will each receive the same amount – regardless of what they are owed.
So, if before your bankruptcy case is filed you pay one of your unsecured creditors $5,000 but don’t pay any of the others, they are getting more than they would in your bankruptcy case. The court can go get that money and distribute it evenly among all of the creditors in that particular group. Same thing goes for payments to a family member. If you paid a family member you owe money to within the year prior to your bankruptcy the court can go back to that family member and make them pay the money you paid them to the court. They will then take that money and give it to your creditors. In Arizona the bankruptcy trustees will often give you the opportunity to come up with the money before going after your family member.
Those are just a couple of the transactions that must be disclosed in your bankruptcy. These items are disclosed in a document called the Statement of Financial Affairs or SOFA for short. I am in the process of drafting an article that goes in to some depth into this document and what you are required to disclose.
As with all areas of bankruptcy, when it doubt, disclose it to your bankruptcy lawyer. They can help you in dealing will almost any issue prior to your bankruptcy filing.