What I love about bankruptcy is that each individual case presents unique challenges and the opportunity to learn new things as an attorney. .
A few years ago I helped a client file a chapter 7 bankruptcy. During this case, I was introduced to the phantom mortgage payment.
This phantom still haunts me to this day and I plan to never encounter it again.
Let’s call this particular debtor “Mrs. A.” Mrs. A was proceeding with a chapter 7 bankruptcy.
She didn’t have much, but she did have a significant amount of equity in her home. Fortunately, this equity fell within the “homestead exemption” and her home was not in jeopardy.
Unfortunately, when you use the homestead exemption here in New York, you are not entitled to exempt any cash. Doing what any qualified bankruptcy lawyer would have done, I engaged in some pre-filing asset/exemption planning.
I advised Mrs. A to pay her mortgage payment with the money she had in her bank account and we would file once the payment cleared.
Approximately one week later, Mrs. A gave me the go ahead and the case was filed with the court.
The Phantom Payment
Mrs. A assumed that since the check was written more than one week prior, that her mortgage lender had credited it. In fact, the payment was not credited for almost 14 days.
Meanwhile, her chapter 7 bankruptcy case was filed and as of the date of filing, the funds were still in her bank account. This cash immediately became property of the bankruptcy estate.
Following the filing, but subsequent to the 341 Meeting of Creditors, the check was credited. The trustee now demanded turnover of funds that Mrs. A no longer had.
She had to borrow money to pay the trustee. This was unfortunate as this situation could have been avoided.
Mrs. A could have taken a look at her account to verify that the payment cleared. I could have requested a copy of Mrs. A’s account statement to verify that my client was giving me accurate information.
Lesson learned. Never assume anything because you know what happens when you assume.
Ultimately, Mrs. A got her discharge from the court, was satisfied with the results and was happy to be debt free with a fresh financial start. .
I have since handled many similar situations and the good news is, I have banished these phantom mortgage payments from my cases.
Image courtesy of Doom64 (Flickr).