There are plenty of financial emergencies that necessitate a fast bankruptcy filing, like a home foreclosure, vehicle repossession, or a wage garnishment. But when a debtor has time to prepare their bankruptcy petition, they have time to avoid pitfalls that can make their filing less effective. The 90-day red zone before a bankruptcy filing is the most crucial period to look out for restricted spending. The trustee will be poring over all of the debtor’s financial records from that time, looking for deviations from the information provided in the bankruptcy petition. The consequences of mistakes and intentional misrepresentations here can be severe. Read on to learn more about the 90-day red zone before an Arizona chapter 7 or chapter 13 bankruptcy filing. For your free phone consultation with a dedicated Arizona bankruptcy professional, call 480-485-1010.
Preferential Payments
Preferential payments are a major concern during the 90-day period, which the bankruptcy trustee will pay close attention to. It can cause issues if you paid back some creditors in favor of others shortly leading up to a bankruptcy filing, especially if you shared a special relationship with that creditor.
In the months leading up to bankruptcy, you may have had various priorities in how to use limited funds. That might be paying towards certain bills so you can continue utilizing those lines of credit, paying off personal loans to eliminate payments from your monthly budget, etc. The trustee will review your financial statements for these payments and, if they are present, “claw” them back from your creditors. The amount paid toward them should be distributed among your creditors fairly.
Insider payments receive even stricter treatment for a longer period than the 90-day red zone. Insiders are people like family members, friends, business partners, neighbors, etc. The trustee will claw back payments made to insiders for one year before your bankruptcy petition was filed. This is entirely separate from the debtor being held liable for that amount. The trustee pursues the recipient for that amount through a clawback lawsuit.
Sales or Transfers Below Market Value
Assets are only protected in bankruptcy if there is an applicable exemption to protect them. This inevitably leaves significant funds and assets vulnerable in many bankruptcy filings. Sometimes, these debtors will try to bypass this issue by selling or transferring their assets before filing a petition for bankruptcy. Arizona specifically forbids this in A.R.S. § 44-1004. A transfer is considered fraudulent if it was made with actual intent to hinder, delay, or defraud any of their creditors. It is also considered fraudulent if the debtor didn’t receive a reasonable exchange or the debtor incurred debts beyond their ability to pay as they came due. When reviewing the former definition of a fraudulent transfer, there are eleven statutory factors that should be considered:
- The transfer or obligation was to an insider (see above);
- The debtor retained possession or control of the asset after the transfer;
- The transfer or obligation was disclosed or concealed;
- Before the transfer was made or obligation was incurred, the debtor was sued or threatened with a lawsuit;
- The transfer was of substantially all of the debtor’s assets;
- The debtor absconded, or left hurriedly and secretively;
- The debtor removed or concealed assets;
- The value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred;
- The debtor was insolvent or made insolvent before or shortly after a substantial debt was incurred;
- The transfer occurred shortly before or after a substantial debt was incurred; and
- The debtor transferred the essential assets of their business to someone who then transferred those assets to one of the debtor’s insiders.
Clearly, bankruptcy trustees are prepared to find assets that debtors attempt to conceal through transfer or below-market sale. And the debtor should be worried about these factors for longer than just the 90-day red zone. Trustees typically look back for four years before filing for these types of fraudulent transfers. Under the federal provisions, a trustee can look back over a ten-year period for fraudulent transfers. What will it look like if the trustee discovers a fraudulent transfer? Let’s say you sold a vehicle worth $10,000 to a friend for $1,000 just a few weeks before filing for bankruptcy. If the trustee finds evidence of this, they may reverse the transfer and seize the vehicle back from the friend. The trustee can sell off the vehicle, but they can also request that your bankruptcy discharge be denied.
Limits on Credit Card Spending
If there were no limits on credit card spending before bankruptcy, many debtors would likely max out as many credit cards as possible on cash advances and splurge purchases. Luxury purchases are those not necessary for a reasonable standard of living, like travel, designer goods, gambling, and dining out. A debtor should not exceed $825 on these types of purchases during the 90-day red zone. They should also avoid cash advances exceeding $1,250 from a single creditor in the 70 days leading up to a bankruptcy filing. When a debtor exceeds these limits, those credit card debts will not be included in the bankruptcy discharge. However, if the debtor files for chapter 13 bankruptcy, they can be included and paid off in the payment plan.
Avoiding the Retirement Withdrawal Trap
Retirement savings are meant to support an individual after the end of their career, but some can’t help but take early withdrawals from their retirement savings accounts during financial emergencies. This might stave off financial problems in the short term, but that person will be hit with tax penalties and other costs associated with early retirement withdrawals. Additionally, most 401(k)’s, IRA’s, and other ERISA-qualified retirement accounts are completely protected throughout the bankruptcy process. Therefore, it can often be a waste for someone to withdraw from their retirement funds to pay debts that could be discharged by bankruptcy, especially if that person is eventually forced to declare bankruptcy anyway. If you see bankruptcy on your horizon, you should avoid withdrawing from your retirement savings during the 90-day red zone and even longer before your bankruptcy filing.
Consult with a Bankruptcy Professional Before Your 90-Day Red Zone Begins
Upon further review of their situations, some of our clients are good to file immediately because they haven’t violated pre-filing restrictions in the past 90 days. Others must wait at least 90 days to avoid some of the downsides of filing for bankruptcy without the proper preparations. Unless you have prior experience in bankruptcy or other legal matters, answering that question alone can be difficult without some assistance from a professional. Our Arizona bankruptcy team offers free consultations by phone to start the process of comprehensive debt relief. We can help you determine if chapter 7 or chapter 13 is a better fit for your situation, and if you qualify, offer a post-filing payment plan designed to fit within your budget guidelines. Only you can take that first step towards a financial clean slate. Reach out for your free consultation by phone today at 480-485-1010 for more.
