Phantom Payments Prior to Bankruptcy

Image courtesy of  kenny_barker  (Flickr).

Image courtesy of kenny_barker (Flickr).

As boring and crazy as it may sound, I find the practice of bankruptcy law quite exciting.

Each individual case has a life of its own and presents unique challenges.  I am consistently given the opportunity to learn new things and grow as a bankruptcy lawyer.  I also get to meet some fun and interesting people along the way.

Eleven years into my legal career, I look back and remember a specific case I handled many years ago.

During the evolution of this seemingly “standard” chapter 7 bankruptcy case, I was introduced to “phantom payments” and to this day, I am still haunted by it.


Ms. Smith (name has been changed) had hired our law firm to help her file chapter 7 bankruptcy.

Ms. Smith had few personal property assets but she did own a home with a significant amount of equity.  Fortunately, her equity did not exceed the allowable homestead exemption so her house was protected.

The homestead exemption only protects equity in your real estate and does not apply to any personal property.

Prior to filing bankruptcy, I engaged in some pre-filing exemption planning with Ms. Smith and advised her to pay her mortgage to deplete some of her cash reserves.  

I told Ms. Smith to “give me the go ahead” when the mortgage payment cleared.  One week later, I got her phone call and filed her case.


Ms. Smith (and myself) assumed that since the check was written more than one week prior to the filing that her lender had credited the payment.  In fact, the payment was not credited for almost fourteen days.

So, as of the date of case filing, Ms. Smith still had those funds in her bank account.  As her cash could not be protected by any exemption, the cash immediately became the property of the bankruptcy estate.

Following the filing, but subsequent to her court hearing, the lender credited the payment.  Unfortunately, the trustee now demanded turnover of the funds that Ms. Smith no longer had.

Ms. Smith was forced to borrow money to pay the trustee.

Ms. Smith could have verified that the payment had cleared prior to giving me the go ahead.  More importantly, I could have requested proof that the payment cleared in order to ensure I was getting accurate information from my client.  

Lesson learned, never forgotten.  Never assume anything because you know what happens when you assume and in bankruptcy, this rule applies to lawyer and client.  

Ultimately, Ms. Smith got her discharge, was satisfied with her results and was content to be debt free with a fresh financial future on the horizon.

In Montana, when you file bankruptcy, like Ms. Smith you are not entitled to a cash exemption.  As a result, almost every case I handle involves some level of pre-filing cash exemption planning.

The good news is I have completely banished these phantom payments from my cases.