Minnesota Bankruptcy Attorney David Kelly

June 22, 2022October 13, 2022

Fresh Increases in Minnesota State Exemptions

By Dave Kelly, Minnesota Bankruptcy Lawyer

In a Chapter 7 bankruptcy if you want to keep your assets and belongings, they have to be claimed as exempt under an applicable exemption law. In Minnesota there are two exemption laws to choose from, the federal list and the state list. I have written a lot elsewhere about why one would choose one list or the other. That is not my topic here. I just want to talk about how most of the state exemptions are going up in a few days. The federal exemptions were increased on April 1st this year. I covered that in a recent blog post.

On July 1st in even numbered years, certain parts of the Minnesota state exemptions are updated to keep up with inflation. Since this year is even numbered, we are about to have another update. I am glad to see that all the numbers which can be changed are going up.

Summary of Minnesota Exemption Increases

Household furniture, household goods increased from $11,250.00 to $11,700.00.
Wedding rings increased from $3,062.50 to $3,185.00.
Tools of the trade increased from $12,500.00 to $13,000.00.
Life insurance benefits increased from $50,000.00 to $52,000.00.
Additional dependent insurance benefits increased from $12,500.00 to $13,000.00.
Motor vehicle increased from $5,000.00 to $5,200.00.
Insurance policies increased from $10,000.00 to $10,400.00.
Employee benefits (retirement accounts) increased from $75,000.00 to $78,000.00.
Homestead (limited to 160 acres) increased from $450,000.00 to $480,000.00.
Homestead used primarily for agriculture increased from $1,125,000.00 to $1,200,000.00.

Our Minnesota State Exemptions Remain Far from Perfect

For a more complete rundown on how this all works, take a look at my exemptions page. These state exemptions leave a lot to be desired. They have a lot of gaps which seem to always allow the bankruptcy trustees to require my clients to buy back some of their stuff. Most jewelry is not exempt. Most electronics are not exempt. There is no exemption that covers tax refunds, and there are issues with money in bank accounts. I have ranted about this on this blog before. The legislature needs to fix it but they don’t.

The Minnesota state exemptions are primarily good for one thing. They allow you to protect lots of equity in your homestead, unlike the federal exemptions which are very limited in that area. I don’t think any of the increases here have kept up with the real rate of inflation; so in fact we seem to be loosing ground.

If you don’t properly claim any asset as exempt, you risk losing it to the trustee. It’s tricky and risky and should not be attempted without a lawyer.

April 26, 2022June 3, 2022

Qualifying For Chapter 7 and Protecting Assets now Easier

By David Kelly, Minnesota Bankruptcy Attorney

Easier Qualifying for Chapter 7 Bankruptcy in Minnesota

The primary requirement for being able to file a Chapter 7 bankruptcy is to have your income below a certain level. Stated most simply, to qualify for Chapter 7 you want your income to be lower than the median income for your household size in your state. These levels are set by the Department of Justice, US Trustee’s Office; and new, higher numbers came out recently on April 1st. If your income is slightly above the median, there is a means test that you might be able to pass which would allow you to still file a Chapter 7. Doing the means test, however, can sometimes be an invitation to a close scrutiny of the case. Being below the median is best. Here are the April 2022 numbers and how much they just went up.

Minnesota Median Household Income April 2022

One person:    $  65,514 — Up $2,490

Two people:    $  86,358 — Up $3,875

Three people:  $ 106,445 — Up $4,776

Four people:   $ 125,753 — Up $5,533

Five people:   $ 135,653 — Up $6,543

Six people:    $ 145,553 — Up $7,443

More information at https://mn-bankruptcy.com/chapter7.html

Easier Protection for Your Stuff in Minnesota Chapter 7

As soon as you file a Chapter 7 bankruptcy, the court appoints a trustee whose job it is to find assets that can be used to pay all or part of your debt. You really want the trustee to not be able to find any assets, or certainly not much for assets. The way to keep your assets away from the trustee is to claim them as exempt. What you can claim as exempt and how much is obviously very important. In Minnesota you have a choice between a state exemption list and a federal exemption list. In this post I am only talking about the federal list. The federal exemptions just went up in every category. Here are a few typical items and how much they went up. These are just a few examples. It is not anywhere near a complete list.

April 2022 Federal Exemptions

Household goods  $14,875  -  Up $1,475

Car              $ 4,450  -  Up $  450

Tools of Trade   $ 2,800  -  Up $  175

Cash value of
Life Insurance   $14,875  -  Up $1,475

Catch-all        $15,425  -  Up $1,525

More information at https://mn-bankruptcy.com/exemptions.html

There is now word on the street that a round of increases to the Minnesota state exemption list is being contemplated for July 1, 2022. Watch my blog for news about that.

January 5, 2022September 13, 2022

Top 7 TO DO’s Before Bankruptcy: Item 7 – Avoid High Bank Balances if Expecting Garnishment

By David J. Kelly, Minnesota Bankruptcy Attorney

This is the final post in my series on the top seven things you should probably be doing if you are considering a Chapter 7 or a Chapter 13 bankruptcy. I don’t intend to help you with a do it yourself bankruptcy. My purpose is to introduce topics for you to discuss with your lawyer. Don’t try this by yourself.

Bank Accounts Can be Frozen Without Advance Notice

Let’s say you have been sued by a creditor. The judgment has been entered and now the creditor is looking for assets to seize. To garnish your wages the creditor has to give you a ten day notice – or at least is supposed to. But in Minnesota no advance notice is required before a garnishment of a checking or savings account. If the creditor garnishes your bank account, the first you may hear about it is when your bank or credit union notifies you that the account is frozen. Before you even get notified by your bank or credit union, you may notice that your checks are bouncing, your payments are not going through, and the pay check that was recently deposited is now beyond your reach.

You Must Claim All or Part of the Account as Exempt to Get Access to Your Account Again

More than likely all or a good part of the money in your account is exempt and cannot be taken by the creditor. After the account is frozen, you will be (or are supposed to be) given an Exemption Form that you can use to claim your exemptions. You might not receive this for a few days after the account is frozen. Then you have to fill it out and send it back to the creditor’s lawyer. Once the lawyer receives it, he or she is supposed to release to you that part of the money in the account which is exempt. Days can pass, even a couple of weeks, before this process is completed. Then you can use your account again, minus whatever amount the creditor took out of it. More accurately stated, you can use your account again until the next time the creditor garnishes it.

Avoiding or Minimizing the Freezing of Your Bank Account

Maybe this can’t be avoided, but the problem can be minimized. One thing you can do is what I suggested in Item 3 of this series: Move your money to a bank that will be harder to find. Creditor’s attorneys often send out a shotgun blast of garnishment notices to all the major banks. They don’t know where you bank, but chances are that if you are using one of the larger banks your account will get caught in the net. People have been surprised and asked me how the creditor knew where they banked. The answer is that the creditor didn’t know, they just got lucky. I love the little banks that nobody has heard of. Any bank whose name starts with “State Bank of ….” is probably a good bet.

Another thing you can do is just keep the bank balance as low as possible. The creditor can only freeze what is in the account. This might involve making cash withdrawals and cash deposits as needed to cover the things that must be paid out of the checking account. The back and forth movement of cash may look suspicious to a bankruptcy trustee. The trustees are always looking for evidence that money is being hidden. You and your lawyer might have to explain why this is being done. But once the trustee understands that this is merely an effort to avoid or minimize garnishment, it should be OK. We will have to be careful to accurately disclose the cash on hand in your bankruptcy forms. All assets have to be disclosed.

No One Size Fits All Solutions

This topic is something you are going to have to discuss with your lawyer. Cash can be harder to claim as exempt than money in the bank, at least in a state exemption case. If you are using the state exemptions and not the federal exemptions, having large amounts of cash might be a really bad idea. You might be setting yourself up to have the bankruptcy trustee take your money, which is just as bad as having it garnished. There are no one size fits all solutions. Don’t do any of what I discuss here without being advised by your attorney.

Call Dave at 952-544-6356.

November 12, 2021September 7, 2022

Top 7 TO DO’s before Bankruptcy: Item 6 – Be Open and Honest with Your Attorney

By David J. Kelly, Minnesota Bankruptcy Attorney

Please Just Tell me the Truth

Sorry, but there is no substitute for being forthcoming with your lawyer, even if it’s embarrassing or awkward to disclose certain information. Spending time at a casino ? I really need to know that. Living off relatives? Tell me all about it. Fired from your job? Better give me the whole unpleasant story. Been taken financial advantage of by a significant other? You don’t have to be shy with me. And there isn’t much I haven’t heard over the years. Many of the reviews say I’m not judgmental. I believe you can expect to find that this is true.

Let’s You and Me Stay Out of Jail

All your debts have to be disclosed. So do all your assets. Concealing a debt, an asset or some of your income is considered bankruptcy fraud. So is not being entirely truthful about what debts you have been paying and any relationship you might have with any particular creditor. It might seem innocent to you, and maybe it really is, but the law considers it a crime. No client of mine has ever gone to jail for bankruptcy fraud, and I would like to keep it that way. These days under current law, if my client is going to jail there’s a good chance I would be going with them. Let’s both of us stay out of jail.

Just tell me all about it. Very unlikely that it’s something I’ve never heard before.

Not the Time for Creativity

Don’t try to be creative. Because every dishonest scheme you can think of has already been thought of. No, you can’t sell your boat to your brother for a dollar. And you can’t have a friend hold some money for you. The bankruptcy trustees have the resources of the FBI available if they get suspicious. As a result, there isn’t anything they can’t find out.

Once the bankruptcy is filed, your right of privacy is pretty much gone with respect to any of the information required for the case – and that’s most everything there is to know about you. Even if there are not criminal charges, there are plenty of other sanctions. Your case could be dismissed without a discharge. The discharge could be denied for all or some of your debt. If you get a discharge, it could be revoked. And that asset you were trying to hide, whatever it is you probably are going to lose it.

Give Me a Chance to Solve the Problem

Your attorney is on your side. The information which I ask for is necessary to successfully file your bankruptcy case. If you would just be truthful with me, I can probably figure out a legal way to fix whatever you are thinking the problem might be. Most of the things people have lied to me about could have been dealt with successfully IF ONLY my client would have told me about it BEFORE the case was filed.

Disclaimer

I am a debt relief agency. I help people file for bankruptcy relief under the federal bankruptcy code. This post is for general information purposes only and does not create an attorney-client relationship. It is not legal advice. Seek the advice of the attorney of your choice concerning the details of your case.

Call Dave at 952-544-6356

October 1, 2021October 13, 2022

Top 7 TO DO’S before Bankruptcy: Item 5 – Stay Current with Car Loan and Mortgage

By David J. Kelly, Minnesota Bankruptcy Attorney

This is the 5th in my series on the top seven things that you should be doing when you are seriously considering the filing of a Chapter 7 or a Chapter 13 bankruptcy. Here I talk about staying up to date with your rent, your mortgage and your car loan. In other words, pay your ordinary living expenses.

Most of my clients want to keep their house or want to continue living in their apartment. And most of my clients want to keep their car. If you are going to surrender your home, break your lease or surrender your car, that’s a different situation and you should probably disregard what I say here.

Bankruptcy Does Not Get Rid of Liens

Once the bankruptcy is finished the underlying debt should be gone but the lender’s lien on your car and your home will remain. This means that if you want to keep the house or car, you still have to make the payments – even though technically you don’t owe the debt any more. All the creditors are going to be under a court order which will tell them to leave you alone. This includes the debts you want to get rid of and the debts you want to keep paying. The creditors will all stop billing you. They might shut down your on line access to your accounts as well.

Keep Up House and Car Payments Even When the Bills Stop Coming

Most of the time, after the bankruptcy is over, the creditors you want to continue paying can be persuaded to start sending monthly statements again. If you reaffirm the debt you will start getting regular bills again once the bankruptcy is final. Whether you should reaffirm is a tricky subject which I have discussed elsewhere and won’t be dealing with here.

If you have not reaffirmed but want to keep paying, you can usually get the creditor to start sending what they call “informational statements.” They will look different than your bills used to. There is language in them which says something like “we know you don’t owe this because of the bankruptcy, but just in case you might want to pay voluntarily here’s the info about your account.

Do Not Pay Ahead

Keep up your payments but never pay extra. Do not pay ahead on your mortgage, rent or car loan or car lease. Paying ahead on things like that is considered to be hiding money. In Chapter 7 the trustee might go after the creditor or go after you to get the extra money back. In Chapter 13 you are proving you have money to spare and the trustee could want to raise your plan payment amount.

Listen to Your Attorney

I make a point of reminding my clients they have to continue paying these normal expenses. For some reason there seems to be a certain percentage who don’t hear me. They seem to think that since the bill stopped they don’t have to pay. Then when there is a threat to foreclose the house or send a tow truck for the car., my phone rings. I hear “oh I didn’t know I had to keep paying that.”

If you are far along in preparing to file a bankruptcy, I hope you have hired a lawyer. If you have not, it’s time you do that. What I say here may apply in most cases, but it might not apply in yours. Talk with your own lawyer about the details of your case.

Disclaimer

Call Dave at 952-544-6356

July 6, 2021September 13, 2022

Top 7 TO DO’s Before Bankruptcy: Item 4 – Retain an Attorney

By David J. Kelly, Minnesota Bankruptcy Attorney

Get Professional Advice

Filing a bankruptcy is a big step. You don’t want to do much or go very far before you consult a lawyer. In preparing to file your case, there may be some financial moves you should make. I cannot emphasize more strongly that you should not make any major changes of any kind without consulting a lawyer first. Be sure that the lawyer knows bankruptcy law – many do not. I often suggest that whoever you talk with should belong to the National Association of Consumer Bankruptcy Attorneys (NACBA) . Any attorney who is serious about learning what they are doing in the field of consumer bankruptcy would be a member. You need someone to consult. You need somebody to plan with. You can’t afford to make a mistake at this phase of things. It’s time for you to hire (“retain”) a bankruptcy lawyer.

Things You Can’t Do Without Retaining an Attorney First

Once you retain a lawyer, that is once the attorney-client relationship is brought into existence by means of a retainer agreement, you have the ability to do several things you could not do before.

For one thing, you can refer calls from bill collectors to you lawyer. I like to keep the bill collectors in the dark about what we are up to. But sometimes they may start calling your mother, or one of your children, or your place of employment. Sometimes they manage to be such a nuisance that you really need them to stop. Once your case is filed they will be under a court order to stop. But what can you do before the case is filed? Here’s what. Answer the phone. Tell whoever it is that you have retained an attorney to do a Chapter 7 or Chapter 13 bankruptcy and you have been advised to not speak with them. But then you give them your lawyer’s name and phone number and say they should call your lawyer. Normally that will be the last you hear from those people.

For another thing, you can set up a payment plan with the lawyer so you can get the attorney fee paid by the time the bankruptcy is ready to file. In Chapter 7 cases your attorney has to be paid before the case is filed. After the case is filed, if you owe money to your lawyer he or she is just another creditor who is forbidden from trying to collect from you. Since it usually takes a few weeks if not longer to prepare a case for filing, this is the perfect time to make payment arrangements for the attorney fee, court filing fee and perhaps also the credit report fee. In Chapter 13 cases the attorney fee can be paid as part of the Chapter 13 plan, but most attorneys still like to have a good part of their fee and costs paid before the case is filed.

And of course hiring a lawyer means you now have somebody to consult with and plan with as you go about the difficult job of planning and putting together your bankruptcy case.

Disclaimer

Call Dave at 952-544-6356

June 2, 2021September 13, 2022

Top Seven TO DO’S Before Bankruptcy: Item 3 – Consider Changing Banks

By David J. Kelly, Minnesota Bankruptcy Attorney

Take Care About Where You Bank

I’ll never forget a certain day a few years ago when I had a hearing downtown at the federal courthouse. When I arrived that day the hallway outside the hearing room was crowded and my clients were there waiting for me. First thing they said, to my surprise, was that they were sure glad they had hired me. Before my arrival they had overheard someone else complaining loudly to their lawyer about having the money in their checking account seized by their bank. My clients knew I had made sure that wasn’t going to happen to them. They were very grateful.

Your Bank May Have a “Right of Setoff”

If you owe money to your bank or credit union on the day you file a bankruptcy, they may seize the money in your checking and savings accounts and apply it toward what you owe. The first time I saw a bank do this I thought they were violating the automatic stay. The automatic stay is the court order addressed to all the creditors when a bankruptcy is filed. It tells them to stop all collection efforts. It turned out the bank was exercising what they call a right to setoff. This is one of the exceptions to the automatic stay. Apparently the reasoning is that they are considered to have the money in your accounts already, so they aren’t really taking anything new from you when they seize it. This is twisted logic in my opinion, but nobody is asking me.

They May Freeze Your Account Even if They Don’t Have a Setoff

Lawyers I know have repeated told me that one of the banks in our community has been known to sometimes freeze a person’s account when they find out that customer has filed a bankruptcy. They apparently do this even when their customer does NOT owe them anything. What it is said they do is freeze the account and then send a letter to the bankruptcy trustee asking what they should do with the money. If the customer has managed to claim the contents of the bank account as exempt, the trustee will probably say to let the person have their money. But in the mean time the account could be frozen for a week or ten days. Obviously this could be very inconvenient if not tragic. I have never understood why they do this. It has not happened to any clients of mine because I always advise staying away from that particular bank, I tell them to open a new account somewhere else and get the old accounts closed before we file.

Consult your lawyer about this issue. Every situation is different. Some institutions are worse than others. Many might not bother seizing or freezing your money if your balance is low. The lawyers I know often debate how low of a balance it takes to avoid this problem. Nobody knows for sure. The safest thing to do is just change banks before you file your bankruptcy.

Call Dave at 952-544-6356 for a free telephone consultation

I am a debt relief agency. I help people file for relief under the federal bankruptcy code. This post is for general information purposes only. It is not legal advice. It does not create an attorney-client relationship. Consult the attorney of your choice concerning the details of your case.

March 31, 2021September 13, 2022

Top Seven TO DO’s Before Bankruptcy: Item 2 – Get Your Credit Reports

By David J. Kelly, Minnesota Bankruptcy Attorney

This is the second in a series of seven blog posts about my top seven things that you should do if you are preparing to file a bankruptcy. This also applies even if you are just considering filing a bankruptcy – either Chapter 7 or Chapter 13. What I want to talk about it getting your credit reports. I wouldn’t dare want to file somebody’s bankruptcy without reviewing at least one credit report. There are three major reporting agencies which each produce their own reports – Experian, Equifax and Trans Union. Usually all three reports are about the same, but not always.

Easiest way: Authorize Your Lawyer Get Your Credit Reports

While you can get your reports on your own, your best choice is to have your lawyer get them for you. For $37 per person I can get a report that pulls information from all three credit reporting bureaus. We will have to provide your email address and social security number. After that we will have to answer three questions to which only you would have the answers. Then I can download your comprehensive credit report info directly into my bankruptcy software. And I will print a copy of the report for you. As a bonus it provides your credit score along with a prediction of what filing bankruptcy will do to your credit score. Somewhat surprisingly, the prediction is usually for an improvement in the score.

The Hard Way: Get the Reports Yourself

If you want to get the reports on your own, the best place to go and the only place I recommend is https://annualcreditreport.com. There is a federal law that requires the three major reporting agencies to make a report available to each individual once a year. This site was created by the agencies to satisfy this requirement. Unlike the other resources I am aware of, this web site is really free. All the other sites will want you to subscribe or sign up for something. The one exception at annualcreditreport.com is if you ask for your credit score. Don’t do that. It looks like they want to get something in exchange for that, and I don’t need the credit score. I just want to know who the creditors are.

It helps me if you can download each report as a pdf document and then print it on paper as well. If you don’t have a printer, send me the pdf and I’ll print it. There is often a problem in printing these reports where the printer cuts off the top, bottom or side of the pages. If that happens the report is often missing so much that it is not useable. Problems like this can be avoided of course if you just have me get the reports instead.

The Bankruptcy Must List All Your Debts

I can’t emphasize enough how important it is that we list all your debts. Failure to list a debt could result in that debt not being discharged. Unlisted debts aren’t discharged in Chapter 7 cases where there are assets for the creditors. Unlisted debts are also not discharged in Chapter 13 cases. In those situations the creditor could have filed a claim and gotten their share of the payments or assets. But they can’t file a claim if they are never notified. So the discharge doesn’t apply to them.

Creditors can be added for a while after the case is filed, but it is obviously much better to get them all listed to begin with.

Sometimes certain debts don’t show on your credit reports. An example of this is medical bills. The medical people have a confidentiality requirement and don’t want to just tell the world that you owe them money. Typically medical bills don’t show up on credit reports unless they have been sent to a collection agency. In order to report to a credit bureau, the creditor has to have a membership in that bureau. Many small businesses do not have or can’t afford to have that, and debts owing to those businesses won’t be on the reports either. Please keep in mind that even if the debt doesn’t show on the reports, it is still your responsibility to make sure all your debts are listed in the case. You have to give this info to your lawyer. Your lawyer isn’t a psychic.

Disclaimer

This post is for general information purposes and is not legal advice. It does not create an attorney-client relationship. Small details in your case can make a big difference. Consult the attorney of your choice concerning the details of your case. I practice in Minnesota. Laws and practices may be a lot different in your state.

Call Dave – It’s Free

Call Dave for a free telephone consultation. 962-544-6356.

January 26, 2021September 13, 2022

Top Seven TO DO’s Before Bankruptcy: Item 1 – Gather Your Financial Records

By David J. Kelly, Minnesota Bankruptcy Attorney

This is the first in a series of seven posts about my top seven things that you should do if you are considering bankruptcy or preparing to file – either Chapter 7 or Chapter 13.

Item 1 on my list is that you should gather the financial records that your attorney will need to process your case. These will include payroll check stubs, bank statements, mortgage records, and tax returns. You should also be gathering together your monthly statements for all your debts. Include any nasty letters you may be receiving from lawyers or collection agencies. Don’t just gather the records you have, but also start keeping records of all your financial transactions. Keep track of your expenses. Keep all your receipts. If there is legal action against you, keep all the paperwork from that. There is a human tendency to want to throw away paperwork that contains bad news. Don’t do it. Keep it and give it to your lawyer.

Income Information

Your attorney will want to see at least six months of income information. Typically this would be pay stubs from any employment you have had during the most recent six months. He or she will also need to know about unemployment benefits, disability benefits, social security benefits, retirement income and any other income source for that six months. If you are self employed or operating a small business, create a cash in – cash out statement. This is a listing of funds received and business expenses paid over that the most recent six months. I prefer to it broken down by month. For a self employed person, “income” usually will be the difference between the cash in and the cash out.

Bank Statements

The trustee in your bankruptcy case will always ask to see at least 30 days of bank statements. Maybe they will ask to see as many as six months of bank statements. This would be a printout or statements for any bank accounts you may have. It always has to include the balance on the day the case is filed. If there are red flags in your bank statements, you want your lawyer to see them before somebody else does. Most of the time I start by asking to see my client’s most recent bank statement. Then I may ask for more depending on what I see.

Keep Your Receipts

If you do a lot of your financial business with cash, it is best to keep very careful records of what you are doing with the cash. Keep your receipts. Keep records for everything you do. You might or might not be asked to produce the receipts, but you should have them ready in case the trustee wants to see them.

Tax Returns

The bankruptcy trustee will require that you produce your most recent state and federal tax returns. I will want to see at least the last two years of your tax returns. There are income questions on the bankruptcy petition that go back two years. The best place for me to get your income information is from the tax returns. If you have unfiled tax returns, I will ask that you get your tax filing up to date before we file the bankruptcy. We have to list all your assets and all your debts. If you owe taxes that’s obviously a debt, and if you have a refund coming that’s an asset. Either way I need to know what that is.

Bills, Nasty Letters and Legal Actions

Even if we eventually get a credit report, there are many things that do not show on those reports. Or the reports might be wrong. So I want to see the statements and letters you have been receiving from your creditors. If there is a lawsuit or a threat of one, I want to see all the paperwork you have about that as well.

Documentation of Assets

If you own your home, find your deed from when you bought the place. Best too if you find a copy of the mortgage you signed at that time. If you have refinanced, find the papers about that too. Usually you get a big folder of stuff when you buy a house or refinance. Just bring that folder to your lawyer and he or she will pick out the needed documents. If you own a car, trailer, camper, or motorcycle, find the title certificates. If you have a boat or an ATV that is registered with the state, find your registration card or papers – your lawyer will need them.

Maintain ongoing records

Finally keep in mind that preparing a bankruptcy is an ongoing process. You are never realy done gathering records. As your attorney works with you to prepare the case, which could take several weeks, continue to keep records. When anything new turns up, be sure you give it to your lawyer.

Disclaimer

I am a debt relief agency. I help people file for relief under the federal bankruptcy code. This pose is for general information purposes only and is not legal advice. It does not create an attorney client relationship.

Call Dave – It’s Free

Call Dave for a free telephone consultation. 962-544-6356.

November 20, 2020December 5, 2020

Things to Avoid Before Bankruptcy: Item 7 – Recent Debt Run-up

By Dave Kelly, Minnesota bankruptcy attorney

This is the last in my series of articles about the top seven things that in my opinion you should avoid doing prior to filing a Chapter 7 or Chapter 13 bankruptcy. My list is not exclusive. There are lots of other things to be avoided. On one web page I saw a list of 33 things to avoid. All I am saying is that this list is my top seven. Others may disagree on my ranking of these.

Why is Debt Run-up Before Bankruptcy a Problem?

The reason you should avoid running up debt right before filing a bankruptcy is that doing so may result in an objection to your discharge from one of the creditors. Typically this would not be an objection to your entire bankruptcy case, but just an objection to the one particular debt owing to that particular creditor. The larger the debt and the closer to the filing date of the bankruptcy it was incurred, the greater the risk.

The creditor will review the account and use the history of the account to try and prove that you had no intent of paying the debt at the time you ran it up. If you had no intent to pay when you incurred the debt, the creditor can object on the grounds of false pretenses and fraud. The evidence that the creditor will use will usually be entirely circumstantial . Basically they put together their case and ask the judge “what’s this look like to you?” Often it can be pretty obvious, other times not.

Worse if for Luxury Good or Services

The creditor’s case is always stronger if the debt is for luxury goods and services, especially if the purchases spike right before the bankruptcy is filed. When somebody who hardly ever goes farther then Duluth suddenly decides they need a trip to Europe, it looks suspicious. Expensive restaurants, large purchases of alcohol, spas and pedicures don’t look so good either. On the opposite end of the spectrum is medical expense. People usually don’t have control of medical costs, and the medical providers almost never object.

What the Law Presumes

Ordinarily the creditor has the burden of proof when they file an objection to discharge. This means that the creditor has to prove their case and the debtor does not have to necessarily prove anything. The bankruptcy statute has two situations, however, where certain presumptions shift the burden of proof to the debtor. Here they are:

1. Any consumer debt for goods and services owed to a single creditor in excess of $725 incurred within 90 days of filing is presumed to be for luxury items. With the proper evidence in your favor, the presumption can be rebutted; but it’s best just to wait so you don’t have to go through a potential objection from the creditor.

2. Cash advances in excess of $1,000 made within 70 days of filing are presumed non-dischargeable. Again, if this has happened it may be best to wait until the time period has passed before filing.

What this Really Means

As a practical matter what does all this mean? In my opinion it means that you might not want to file a bankruptcy if you have run up a debt on any one account in an amount of more than 4 or5 thousand dollars in the past six months. If it’s much less than that, the creditor probably can’t afford to do an objection. If it’s much older than that, it’s might be too hard for the creditor to prove. This kind of recent debt runup doesn’t necessarily mean you should not file a bankruptcy. But it could be a good reason to delay the filing for a while.

Disclaimer

This post is for general information purposes only and is not legal advice. It does not create an attorney-client relationship. Consult the attorney or your choice about the details of your case.