Property Considerations in Bankruptcy
Debtors filing bankruptcy may be confused about what does and does not constitute personal property in their estate. Schedule B of the bankruptcy petition allows the debtor to list any personal property in their possession. However, there are also listings for property not presently (at the time of filing) in the debtor’s possession but in which the debtor might have an interest. For example, personal injury claims, personal loans owed to the debtor and inheritances expected by the debtor are all considered property even without a present ownership interest subject to seizure. Debtors might have inherited from a small estate in the recent past and seen their windfall gone just as quickly after distributions to interested parties and payments to update debts not to be discharged through bankruptcy. Keeping in mind such circumstances will allow debtors to at least explain transfers of over $1,000 to insiders (friends and family members) within the three years prior to filing and payments to a single creditor over $600 within the ninety days prior to filing on the Statement of Financial Affairs.
Another consideration for debtors is a recent divorce. Often, a separation agreement may provide for division of marital assets in such a way that property might appear to have been transferred out of the debtor’s estate. An assumption of responsibility for the marital home by the spouse without an explicit buy-out provision is one such example. Such a termination of debtor’s interest in property through divorce may be explained in the bankruptcy case as one of the above possibilities, an insider transfer or creditor payment. A debtor may not consider themselves to have an interest in such property and thereby omit an asset that could be used to pay creditors.
Debtors are required to provide a statement of their current earnings on Schedule I of the bankruptcy petition. Schedule I does allow for in addition to regular pay regularly received overtime and bonuses or commissions. Debtors might not, however, regard as part of their earnings a sign-on bonus from recently starting a new position or a generous holiday/special occasion bonus payment. Such payments might in fact cause a debtor’s regular earnings to fall over the median household income level.
Keeping in mind these considerations of property in a bankruptcy case will allow debtors to provide more accurate information to their counsel. Often, a statement in writing from the personal injury or probate counsel might provide helpful guidance in assessing the value of such property. Because the family laws allowing for division of marital property after divorce vary so considerably from one state to another, debtors would be well advised to consult with their divorce counsel even before filing bankruptcy and ensure that their bankruptcy counsel, if not the same, has been made aware of any division of assets that could be considered as insider transfers or creditor payments. The human resources office of debtor’s employer can also be helpful in assessing the level of the debtor’s compensation anticipated over a regular paycheck. Employers need not know the reason for such an inquiry beyond an assessment of the debtor’s financial affairs. As always, the best person to provide a determination whether a certain financial transaction would constitute property of or a transfer from the debtor’s estate would be a qualified bankruptcy attorney in the debtor’s jurisdiction.
