In re Wylie, 119 F.4th 1043 (6th Cir. 2024), a recent case out of the United States Court of Appeals for the Sixth Circuit highlighted the importance of pre-bankruptcy planning and the intent of prospective debtors who may be considering bankruptcy.

Have Questions? Call us for Your consultation.

In re Wylie is a case that involved debtors Jason and Leah Wylie, who faced financial difficulties due to Mr. Wylie's health issues. As they prepared to file for bankruptcy, they delayed filing their 2018 and 2019 tax returns. Their accountant prepared the 2018 returns, which showed significant overpayments and entitled them to a refund. Rather than receive a refund, however, the Wylies elected to apply the refund due to them to their 2019 tax liabilities. This decision was repeated for their 2019 returns filed in 2020, which were filed shortly after they submitted their Chapter 7 bankruptcy petition.

In the Wylies’ bankruptcy, the Chapter 7 Trustee filed an adversary proceeding to deny the Wylies discharge. The Trustee argued that the Wylies’ discharge should be denied for several reasons under 11 U.S.C. § 727, but one of his claims was that, by electing to apply their 2018 tax overpayments to their 2019 tax liabilities, the Wylies transferred or concealed property within one year before filing their bankruptcy petition “with intent to hinder, delay, or defraud a creditor.”

The United States Bankruptcy Court for the Eastern District of Michigan found that the Wylies transferred their anticipated 2019 tax refunds with the intent to hinder the trustee and denied them a discharge under 11 U.S.C. § 727(a)(2). However, the district court reversed this decision, holding that the bankruptcy court's intent finding was clearly erroneous. The United States Court of Appeals for the Sixth Circuit agreed with the District Court and remanded the case to the bankruptcy court to enter a discharge for the Wylies.

The Sixth Circuit held that, in order to trigger the denial of a discharge under 11 U.S.C. § 727(a)(2), the objecting party must prove by a preponderance of the evidence, that the debtor has “actual intent” to hinder, delay or defraud, and that absent such specific intent, as discharge should not be denied. At trial, the Bankruptcy court had concluded that the Wylies did not have an intent to hinder, delay, or defraud creditors when electing to apply their 2018 tax refunds to future tax liabilities but that the Wylies did have such intent when choosing to apply their 2019 refund to future tax liabilities. The Sixth Circuit noted, however, that the Bankruptcy Court failed to note any meaningful factual differences between the Wylies 2018 and 2019 elections and that the Bankruptcy Court’s factual findings actually established that the Wylies did not have a specific intent to “hinder, delay, or defraud” their creditors. 

In re Wiley highlights the importance of pre-bankruptcy planning and the limits of aggressive actions in the months before and sometimes right after the case filing. When anyone plans to file bankruptcy or thinks they may need to file a case sometime in the future, planning and organizing their financial lives to protect their assets makes the process smoother. 

You may plan for a bankruptcy filing, but it is important that you do so without raising the notion that you could be taking actions with the intent to “hinder, delay, or defraud “your creditors. First, you should compile a comprehensive list of assets, liabilities, income, and expenses to understand your financial standing. Next, you should learn about the exemptions in the Bankruptcy Code that will protect certain assets from being liquidated. Also, it would be best if you avoided actions like transferring property at less than the value of it. It would be best if you did not hide assets or make large payments to creditors either. These actions can affect your bankruptcy filing. Finally, seek the professional advice of a bankruptcy attorney and strategically time your filing to maximize the benefits of bankruptcy while minimizing the negative consequences. 

A bankruptcy filing will undoubtedly be difficult for anyone, but planning for it can soften the blow and allow the focus to shift to financial recovery far sooner. If you want to plan for filing bankruptcy or want to discuss filing a bankruptcy, do not hesitate to contact Frost Law at (410) 497-5947 or schedule a confidential consultation.

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The Importance Of Pre-Bankruptcy Planning And Debtor Intent

Published on
November 25, 2024
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In re Wylie, 119 F.4th 1043 (6th Cir. 2024), a recent case out of the United States Court of Appeals for the Sixth Circuit highlighted the importance of pre-bankruptcy planning and the intent of prospective debtors who may be considering bankruptcy.

Have Questions? Call Our Team Today.

In re Wylie is a case that involved debtors Jason and Leah Wylie, who faced financial difficulties due to Mr. Wylie's health issues. As they prepared to file for bankruptcy, they delayed filing their 2018 and 2019 tax returns. Their accountant prepared the 2018 returns, which showed significant overpayments and entitled them to a refund. Rather than receive a refund, however, the Wylies elected to apply the refund due to them to their 2019 tax liabilities. This decision was repeated for their 2019 returns filed in 2020, which were filed shortly after they submitted their Chapter 7 bankruptcy petition.

In the Wylies’ bankruptcy, the Chapter 7 Trustee filed an adversary proceeding to deny the Wylies discharge. The Trustee argued that the Wylies’ discharge should be denied for several reasons under 11 U.S.C. § 727, but one of his claims was that, by electing to apply their 2018 tax overpayments to their 2019 tax liabilities, the Wylies transferred or concealed property within one year before filing their bankruptcy petition “with intent to hinder, delay, or defraud a creditor.”

The United States Bankruptcy Court for the Eastern District of Michigan found that the Wylies transferred their anticipated 2019 tax refunds with the intent to hinder the trustee and denied them a discharge under 11 U.S.C. § 727(a)(2). However, the district court reversed this decision, holding that the bankruptcy court's intent finding was clearly erroneous. The United States Court of Appeals for the Sixth Circuit agreed with the District Court and remanded the case to the bankruptcy court to enter a discharge for the Wylies.

The Sixth Circuit held that, in order to trigger the denial of a discharge under 11 U.S.C. § 727(a)(2), the objecting party must prove by a preponderance of the evidence, that the debtor has “actual intent” to hinder, delay or defraud, and that absent such specific intent, as discharge should not be denied. At trial, the Bankruptcy court had concluded that the Wylies did not have an intent to hinder, delay, or defraud creditors when electing to apply their 2018 tax refunds to future tax liabilities but that the Wylies did have such intent when choosing to apply their 2019 refund to future tax liabilities. The Sixth Circuit noted, however, that the Bankruptcy Court failed to note any meaningful factual differences between the Wylies 2018 and 2019 elections and that the Bankruptcy Court’s factual findings actually established that the Wylies did not have a specific intent to “hinder, delay, or defraud” their creditors. 

In re Wiley highlights the importance of pre-bankruptcy planning and the limits of aggressive actions in the months before and sometimes right after the case filing. When anyone plans to file bankruptcy or thinks they may need to file a case sometime in the future, planning and organizing their financial lives to protect their assets makes the process smoother. 

You may plan for a bankruptcy filing, but it is important that you do so without raising the notion that you could be taking actions with the intent to “hinder, delay, or defraud “your creditors. First, you should compile a comprehensive list of assets, liabilities, income, and expenses to understand your financial standing. Next, you should learn about the exemptions in the Bankruptcy Code that will protect certain assets from being liquidated. Also, it would be best if you avoided actions like transferring property at less than the value of it. It would be best if you did not hide assets or make large payments to creditors either. These actions can affect your bankruptcy filing. Finally, seek the professional advice of a bankruptcy attorney and strategically time your filing to maximize the benefits of bankruptcy while minimizing the negative consequences. 

A bankruptcy filing will undoubtedly be difficult for anyone, but planning for it can soften the blow and allow the focus to shift to financial recovery far sooner. If you want to plan for filing bankruptcy or want to discuss filing a bankruptcy, do not hesitate to contact Frost Law at (410) 497-5947 or schedule a confidential consultation.

Footnotes