Many filers are unaware of some of the intricacies of bankruptcy. It's not only about being free from debt but involving your entire financial situation to a great degree. The bankruptcy court has the power to extract and liquidate assets in order to pay creditors. They also want a say in how certain creditors get paid and that includes actions that take place months before the filer took action. This area of bankruptcy is not as well-known as it should be, so read below and find out more.
Your Debts Are Now the Court's Debts
The bankruptcy court's overall goal when processing a chapter 7 filing is to identify and seize assets from the filer that could be used to pay certain priority creditors. Very few filers have assets that can be seized. In many cases, state exemptions protect a filers' assets from seizure and some assets are not worth enough for the court to bother with. However, the bankruptcy laws still use a priority system when paying debts for the filer. Though the way they decide who gets paid can be complex, here is a general priority list:
- Administrative costs and the trustee's fees.
- Tax debts to the IRS and other taxes.
- Back payments for child support.
If any funds are left after that, general unsecured debts like medical debts, credit card debts, and personal loans are paid. In most cases, however, only the top category is paid unless the filer was very wealthy with a lot of assets.
Previous Debts are the Court's Debts Too
With the above in mind, the bankruptcy court also wants to control debts paid off prior to the filing. However, filers should continue to pay any bills that come due if they can afford to do so. The bankruptcy court, when reviewing your past financial transactions, is more interested in debts you spent more than the usual amount of money to pay. For example, some filers are understandably embarrassed to include a personal loan in their bankruptcy. That could prompt someone to pay off a small personal loan before they file. The bankruptcy trustee can review your financial transactions in the months before you filed to check for potential preferential payments to creditors. Any identified transactions can be reversed if the court sees fit to do so. That means that if you have paid more than the usual amount to any creditor in the past several months, let your bankruptcy lawyer know about it. This situation, in most cases, is not a criminal matter since many filers don't knowingly engage in fraud. Talk to your lawyer to learn more.
For more information, contact bankruptcy attorneys near you.