Weird thing about paying off credit cards in full every month

[ColoradoBell]

So, I've been paying my credit cards in full every month for as long as I've had them.(30 years or so)
So I just assumed that this payment wasn't 'preferential' because I pay in full every month. But when I met with an attorney I was told that I had to stop using my credit cards immediately PLUS I couldn't pay this month as it might be considered preferential. It's not too much...under $1000....but it just seems wrong to me: I bought things that I agreed to pay for yet I can't pay for them ? I put my utilities on these credit cards too.

I guess the reason is that it IS credit for 30 days, unlike a debit card (which I've never seen any reason to have til now).

But the only debt I'm not paying off monthly up to date is judgment liens, which, forgive me, I thought weren't due until I sold my home. (They are liens from unpaid debts, but from X and one from his attorney...awarded by judge knowing that they couldn't be paid until I sold my home, no payment plan agreement or anything).

I realize that when I file that my credit card companies might cancel me anyway, and that sucks, but would a trustee really get my payments back saying that these were preferential?

I also learned from a non bk attorney, that I can't retain him BEFORE filing because that might be taken back by the trustee...I have to wait to hire him for AFTER filing. I don't quite get that and thought it might be the reverse.

[HHM]

All that said, whether it is preferential doesn't matter to the debtor. Preferential payment is an issue between the BK trustee and the creditor. Whether you made preferential payment has no bearing on your ability to receive a discharge, all it does is make your case a potential asset case.

In a chapter 13, preferential payments are usually a non-issue. Since you are making a monthly payment in the plan, you can reconcile the value of the preference. So, preferences don't matter in chapter 13.

As for attorney retainers, the non-BK attorney is correct, if you retain him, and then file BK, the attorney is only entitled to keep the money actually "earned", any unearned retainer is an asset of the BK.

[ColoradoBell]

Thanks, HHM.....
I went back and edited because I said the same thing twice (forgot to delete).

so its the unearned amount from the retainer (tho I guess most lawyers would, like the real estate attoreny I consulted in Feb. when all this stuff with the house began, just saw that the whole retainer (3500) was eaten up by his 'review' even tho he never did anything but meet with me. The nonbk attorney said this went back a year...is that right too?

So in a 13, does 'reconciling preferential payments' mean that the people you were paying monthly don't get anything for awhile in favor of the people you weren't paying at all, until its all caught up?

I thought the attorney said that x's attorney might claim 'preferential' if I paid my cc this month....and yep, we're talking 13 here.

[HHM]

Let's back up and review preferential payment
(Note, if you hired the attorneys I recommended, they would have answered these questions, wink wink )

A preference is a non-exempt asset. So, let's use a more familiar example. Let's say you own a car outright and it is worth $15,000. Colorado has a $5,000 vehicle exemption. Thus, you have $10,000 in non-exempt equity. If you filed chapter 7, your creditors are entitled to that $10,000 and the car would need to be sold (or you need to pay or borrow $10K to keep that car, to redeem it).

One of the rules in chapter 13 is that creditors must receive over the course of the chapter 13 plan AT LEAST what they would get IF you filed chapter 7. So, with the above example, if you wanted to KEEP the car and could not afford to redeem it, the other option is to file chapter 13 BK, and your total payments over 60 months must be at least $10,000. This is known as the liquidation value of the estate. The liquidation value, if any, sets the minimum that must be paid in the plan.

So, when you have non-exempt assets a chapter 13 "reconciles the value" of those non-exempt assets to allow you to keep them.

A preference is simply as asset like any other. If you paid Chase $2,000 and filed BK-7 30 days later, the trustee will demand that Chase turn over that $2,000. However, if you filed chapter 13, and your total payment over the life of the plan was at least $2,000, then Chase keeps the $2,000. Preferences, like any other asset, get reconciled. The typical preference issue is when the debtor paid back mom and dad $10,000 before filing BK. In order to keep the BK-7 trustee from suing mom and dad for that $10K, the debtor would need to file chapter 13 to pay that $10,000 over the life of the plan.

Also, unless the preference payment is to a family member or business partner, the look back on preferences is only 90 days. Also, not sure your Ex husband or his lawyer would have any standing to object to a preference, only the trustee can do that. And even if the Ex did object to a preference, the money only goes to the BK estate.

As for the attorney retainer issue; the court could demand that the attorney prove through billing records that the fee was earned. So, the attorney is under more scrutiny if they try to claim an entire retainer was earned unless they can actually show good faith billing records of HOW the fee was earned.

[ColoradoBell]

ok ....you're gonna kill me BUT:
If I paid with alimony and alimony is exempt from creditors....does that mean it is also exempt from the bk estate?

[HHM]

ok ....you're gonna kill me BUT:
If I paid with alimony and alimony is exempt from creditors....does that mean it is also exempt from the bk estate?

Nope.

Well, let me hedge, probably not. Unless you have a totally separate account that only gets alimony and the account is specifically designated as alimony, then maybe. However, the trustee will argue that once you paid your creditor with those funds, it loses it status as alimony. And as I mentioned, it really doesn't matter.