How to Read & Review Your Bankruptcy Petition: Part 3

Part 3 of our series of Articles on how to read and review the bankruptcy petition prepared for you by your Michigan bankruptcy attorney will conclude this important topic.

In Part 1 and Part 2 of this Article, we described the points you should focus upon when reviewing the first portion of your draft documents: the Voluntary Petition for Bankruptcy itself, Certificate of Credit Counseling, Summary of Assets and Liabilities, and the Petition Schedules.

In this part, we will focus upon the Statement of Financial Affairs alone. The Means Test, the Chapter 13 Plan, and the remaining components will conclude this series in the next installment or installments.

Let’s get started.

 

The Statement of Financial Affairs

 

The Statement of Financial Affairs, or “SoFA,” is considered, along with the petition Schedules, the “meat” of the bankruptcy petition documents. Most of the substance of what you would consider to be your “personal information” is to be found in these areas.

The SoFA is, essentially, a series of questions about your finances and about financial transactions you have engaged in over the time prior to the filing of the bankruptcy petition. What that timeframe is, exactly, differs from question to question.

It is thus very important that you read each question asked carefully and with attention to detail before reviewing your own answer for accuracy.

 

• Part 1 (Questions 1-3)

 

The first three questions of the Statement of Financial Affairs are routinely informational. Here, you are simply asked whether you are married (yes or no check-boxes); whether you have lived anywhere else other than your present residence within the past 3 years; and whether or not you have resided in a community property state within the prior 8 years.

As noted in our prior installment of this Article series, Michigan is not a community property state.

However, if you have lived in another state, particularly California or Arizona, this box may need to be checked “Yes.” Discuss with your bankruptcy lawyer if you’re not sure.

 

• Part 2 (Questions 4-5)

 

Question 4 requires disclosure of your total amounts of income for the present year (to-date) and each of the two prior years. It requires, also, that you verify whether your income is derived from wages or from the operation of a business.

These figures should coincide with the gross income figures from your tax returns for the two prior years. For the present year, it should align with the “Year to Date” earned amount from your latest, pre-filing paycheck stub.

These numbers may need to be updated if more than a few days have passed since you provided this information to your bankruptcy attorney for petition drafting purposes. Make sure it’s current, whatever you wrote down on your  lawyer’s question X days or even weeks prior.

Question 5 asks a similar question: Did you receive income from any other sources during this same time-period?

You may have cashed out a 401(k), received Michigan unemployment benefits, or received income from royalties, dividends, or any number of other sources. Whatever that may have been, it should be disclosed here. Accurately.

If you’re not sure whether some form of money you’ve received is “income,” discuss with your bankruptcy attorney.

 

• Part 3 (Questions 6-8)

 

This Part of the SoFA is arguably the most important section—especially if you are filing Chapter 7 bankruptcy. This is where you can land your grandmother or spouse or other family member (or yourself) in hot water if you answer carelessly or fail to understand what is being asked.

Question 6 seems innocent enough. It asks, firstly, whether your debts are “primarily consumer debts.” This means non-business-related debt, or, in some cases, non-tax debt. There are other types of “non-consumer debt,” also, so discuss this question with your bankruptcy attorney if you now have questions about it and have not done so before.

Mortgages, credit cards, car loans, and most other commonly incurred debts are “consumer debts.”

If you check the “No” box because your debts are primarily non-consumer debts, you must disclose whether you’ve paid any 1 creditor $6,825.00 or more. If so, this may be clawed back from the creditor by, in particular, a Chapter 7 Trustee.

Important Note: Just because you don’t want it clawed back doesn’t mean you can “forget” to disclose it.

If you, like most consumer Chapter 7 and Chapter 13 filers, check the “Yes” box instead, you’ll need to list all creditors to whom you’ve paid $600 or more in total over the past 90 days.

The Chapter 7 Trustee may recover these payments to re-distribute equitably among your creditors. They are “preference” payments, meaning that, by law, you “preferred” to pay that much money to 1 creditor to the disadvantage of the others, who received less.

Question 7 is similar but digs deeper.

Question 7 asks whether you’ve paid any amount of money at all to any creditor who is an “insider.” The definition of “insider” is given, so read carefully. This absolutely means, in particular, a spouse or family member.

If you repaid a loan to your grandmother, even if “just in cash,” it must be disclosed. If sufficient amount, a Chapter 7 Trustee will sue your grandmother to get it back as an “insider preference payment.”

Again, just because you want to “keep grandma out of it” does not mean that you have the legal right to commit perjury and to forget to disclose it here.

Make sure the numbers are accurate. Provide documentation to your bankruptcy lawyer proving how much you did or didn’t pay prior to filing to creditors and insiders.

Finally, Question 8 asks if you’ve transferred money or property in a way that benefited an insider. You need to check “Yes” or “No” and disclose the details accurately if “Yes.”

This question can implicate many fact situations. An example, however, could be titling a used car to someone your cousin owes money to in order to satisfy your cousin’s debt.

 

• Part 4 (Questions 9-12)

 

This Part of the Statement of Financial Affairs requires disclosure of legal actions in which you participated, repossessions, and foreclosures.

If you have not been involved with any lawsuits or had any property repossessed or foreclosed, all 3 questions should simply have the “No” boxes checked.

Otherwise, check “Yes” boxes as appropriate and ensure that all of the details are correct.

Regarding Question 11, you may ask what a “set-off” is, however. A “set-off” is the reduction of a debt owed by the reduction of money or property otherwise used or maintained for other purposes.

In Michigan, the most common “set-off” consumers will encounter is when banking with and borrowing money from a credit union. Credit unions, by law, have the “right of set-off.”

That is, if you take a low interest car loan from a credit union with which you also keep a checking or savings account and miss an installment payment on that loan, the credit union will take the money from your checking account to “set off” the car loan debt owed.

As to Question 12, you would only have had property assigned to a receiver or other court-appointed official if you were involved in a lawsuit. If you’re not sure whether this has happened or not, provide all documentation related to any lawsuit you’ve been involved with to your bankruptcy lawyer for review.

 

• Part 5 (Questions 13-14)

 

Questions 13 and 14 are straightforward. Did you or didn’t you gift money or property worth $600 or more to any person or charity within the past 2 years?

If so, make sure the details are disclosed accurately—and make sure that your bankruptcy has any corresponding documentation.

Anything you gave anyone without payment of any sort or requirement for payment is a “gift.”

 

• Part 6 (Question 15)

 

Question 15 simply asks whether you’ve suffered any losses of property or cash in the past year due to theft, fire, other disaster, or gambling.

Note that there are no minimum threshold amounts described here. Arguably, if you lost $10 buying a Powerball ticket that did not pay off, it should be listed. Discuss with your bankruptcy lawyer.

 

• Part 7 (Questions 16-19)

 

Question 16 asks whether you’ve paid anyone to help you with your bankruptcy process, even if just by way of a paid consultation.

In other words, the lawyers’ fees you’ve paid. Your own bankruptcy attorney’s fees should appear here, along with the dates of all installments paid. Ensure the accuracy of the installments, the dates on which you paid them, and the total amount paid.

The money you paid for the credit counseling course should also appear here, along with any fees paid to prior bankruptcy attorneys within the past year.

Question 17 asks a similar question but isn’t confined to attorneys. Did you pay anyone (or did someone else pay anyone for you) for help in dealing with your creditors?

This means debt consolation “companies” and scammers, attorneys hired for non-bankruptcy debt resolution negotiations, and anyone else. If you’re brother-in-law told you that he could get Citibank to reduce your debt, and you gave him the $50 for this, it should be listed here with all required details.

Question 18 again asks if you’ve transferred any property or cash to anyone within the past 2 years. Note that there is no minimum value amount required for disclosure here.

But also note that it does not includes transfers in the “ordinary course of business.” The money you pay for groceries weekly need not be disclosed (Schedule J does that). Likewise, if your trade or business involves selling, say, used cars off of your front lawn, those arguably need not be disclosed either—but discuss with your attorney before concluding that such things need not be disclosed at all.

Question 19, lastly, requires disclosure of any property or funds to a trust of which you yourself are a beneficiary within the past 10 years.

This includes estate planning trusts. If you aren’t sure, as with all Statement of Financial Affairs questions, first, ask your bankruptcy lawyer, second, err on the side of disclosure.

Again, Bankruptcy Fraud carries a 5-year prison sentence.

 

• Part 8 (Questions 20-22)

 

The questions nested in Part 8 of the Statement of Financial Affairs are reasonably straightforward. These questions ask whether you closed financial accounts (including bank and retirement accounts), owned a safety deposit box, or rented a storage unit within the past year.

If you did, ensure that you have disclosed all required details.

 

• Part 9 (Question 23)

 

Why does Question 23 get its own “Part” of the SoFA? Who knows? But it’s just the one question: Are you holding onto property that belongs to somebody else?

If your brother-in-law keeps his Nintendo at your house, list it. If you have $58,000 in cash under your couch that you claim isn’t yours, you’d better list that, too.

And anything else, no matter how insignificant it may appear to you.

 

• Part 10 (Questions 24-26)

 

These questions will largely only apply to you if you are in business, are a business debtor, or have been in business.

Did you own a factory (or a gas station, even) that released toxic substances into the groundwater in Royal Oak, Michigan? Disclose all details here in each of these questions.

Otherwise, for your average working Michigander, just make sure the “No” boxes are properly checked.

 

• Part 11 (Questions 27-28)

 

Question 27 requires disclosure of any business ownership or business connections within the 4 years prior to the filing of the bankruptcy case.

If this is the case—even for an LLC formed but never utilized (“just on paper”)—disclose all details.

Question 28 requires disclosure of any financial statements issued to anyone related to that business within the past 2 years.

If you did own or do own a business, this may be a CPA, financial advisor, or even the SEC.

 

• Part 12 (Signature)

 

Sign and date the Statement of Financial Affairs here. If you attached additional pages (sometimes, this is required), check the appropriate box.

If you paid a non-attorney, such as one of the “bankruptcy petition preparers” roaming around doing terrible work for people in the Detroit area, disclose that here.

And complete and attach the Petition Preparer’s Notice, as indicated. If you hired a real lawyer to assist you, you won’t need to worry about this.

 

How to Read Your Bankruptcy Petition Statement of Financial Affairs: The Bottom Line

 

The bottom line here, as you have likely realized, is that the bankruptcy filing process is as much about honest disclosure as anything else.

Do you deserve to have your debt discharged? By law, this is true only if you are an “honest debtor” who has fully disclosed all relevant information to the Bankruptcy Court.

The Statement of Financial Affairs is largely concerned with this obligation. It is especially concerned with your need to disclose past financial transactions. Engaging in “funny business” prior to a bankruptcy filing can lead to discharge denial, case dismissal, and, even, as mentioned above, jail-time.

Retaining an experienced bankruptcy attorney to assist you with your petition drafting is crucial to the success of your Chapter 7 or Chapter 13 proceeding.

Attorney Walter Metzen is a Board Certified Bankruptcy Expert who has successfully represented Metro Detroit Chapter 7 and Chapter 13 bankruptcy clients for over 30 years.

If you are considering filing for bankruptcy, contact us now to schedule your free initial consultation.