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

Credit Card Debt

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.

 

Things to Avoid Before Bankruptcy: Item 6 – Paying Ahead on your Mortgage or Car Loan

Sixth in a Series of Bankruptcy Don'ts

By Dave Kelly, Minnesota Bankruptcy Attorney

This is the sixth in a series of posts about the top seven things I recommend you avoid if you are considering a Chapter 7 or Chapter 13 bankruptcy.

Paying extra on your mortgage or car loan might ordinarily be a prudent thing to do. You might even have been advised to do so by a financial adviser or guru. But if you are thinking about a Chapter 7 bankruptcy, or even a Chapter 13, this is probably a bad idea. You are not sure to have trouble with your case if you have been making some extra payments, but the risk that something might go wrong is probably higher because of this. In the old and clanking gears of my legal mind, I can see three ways you could have a problem with this.

The assumption that I am making in this discussion is that you have a car or a homestead which is going to be exempt in your bankruptcy case, and there has been some action by you which increases the amount of the equity in the exempt car or exempt home.

Intent to Defraud, Hinder or Delay a Creditor

I’m talking here about the provisions of 522(o) of the bankruptcy code. It has an intent element. It only applies to your homestead, not your car; and it only applies if you have put extra money into your homestead with the intent to hinder, delay or defraud a creditor. If you are only making a few small extra payments on your mortgage, I would expect it would be very difficult to prove this intent element. But if you are putting a relatively large amount into the house, either by paying the mortgage or by doing a home improvement, you need to have your lawyer screen for a possible problem with this.

To the extent that your trustee can prove that 522(o) applies to a portion of your homestead, that portion is not exempt. That portion will be an asset that the trustee in a Chapter 7 can claim for the creditors. If you can’t figure out any other way, a sale of your home might be required to make this equity available.

Examples I see in the case law include using money from the sale of stock and using money form a large tax refund. Of the various reasons I can see that you might run into trouble for making an extra payment on your mortgage, this is the least likely one on the list. Still I am concerned about the possibility – it’s my job to be concerned.

Fraudulent Transfer – Effort to Hide Assets from Creditors

This is a more likely source of trouble. If you have money or another asset which you take and use to make an extra payment on your mortgage or car loan, a bankruptcy trustee might claim that this is the same as if you gave it to your brother to hold for you so that creditors would not get it. It can be considered hiding money from your creditors. The legal term for this is “fraudulent transfer.”

I have a whole list of questions which I ask potential clients to try and screen for fraudulent transfer problems. There’s a lot more ways this can come up than just extra payments on mortgages or car loans. In Minnesota we have two distinct fraudulent transfer statutes that we have to be concerned about. One provision is in the bankruptcy code itself – this one seems to have no intent element, and the lookback is two years. The other provision is the state fraudulent transfer statute – which looks back six years but at least has an intent element: intent to hinder or delay or defraud creditors.

You are most likely to have a fraudulent transfer problem involving something that happened shortly before the bankruptcy case was filed. Events from more than two years back might not be as much of a problem.

With Homes or Cars that are Upside Down, your Payment could be a “Preference.”

You might want to take a look back at my blog post about item 3 on my list of things to avoid – large payments to unsecured creditors. The bankruptcy code makes some attempt to treat all the unsecured creditors equally, and this involves clawing back large payments which favor one unsecured creditor over another.

So what’s this got to do with a mortgage or car loan? Those are secured, not unsecured. Well if you are upside down on your loan, meaning that you owe more than the security is worth, the loan might be considered unsecured or partially unsecured. In this event the trustee might try to claw back from the creditor ALL the payments made in the 90 days before the bankruptcy is filed. If you’ve been paying extra, it just makes it that much more tempting.

Once the trustee has taken the payments back from the creditor, the creditor will very likely add that amount back in to what you owe. And if you want to keep the car or keep the house, you will eventually probably have to pay it. If this problem arises, you might want to try making a deal with the trustee where you pay in the money so he or she doesn’t go after the creditor.

Conclusion

These are problems that I am always trying to find in advance before filing a case. In many cases I see something that could be a problem, but probably won’t be. Other times it looks pretty serious. If you have been paying extra on your car or home, make sure you give all the details to your lawyer. Your lawyer should be able to advise you how much of a problem it might be.

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.

Things to Avoid Before Bankruptcy: Item 2 – Transferring Assets to a Close Friend or Relative

Things to avoid before bankruptcy

By David J. Kelly, Minnesota Bankruptcy Attorney

This is the second in my series on things to avoid doing before filing a bankruptcy, either Chapter 7 or Chapter 13.

Outright transfers of assets and large gifts are things to be avoided prior to filing any kind of bankruptcy.  An example might be transferring a car or a motorcycle to one of your children, or giving someone a large amount of money or a very expensive gift for their wedding.  Putting relatively large sums of money in a bank account for a child could be another example.  The bankruptcy trustee in a Chapter 7 case may look at transfers like this as an effort to hide assets.  It can be considered bankruptcy fraud and be very detrimental to the case.  The look back on this under the bankruptcy code is two years, but under Minnesota state law it can go back as far as six years.

529 plans have their own special rules about how much a bankruptcy trustee can claw back. 529 plans are educational savings plans that people set up for their child. They have tax advantages similar to a 401K or IRA. But the bankruptcy trustee in a Chapter 7 can claim anything deposited within a year before the case is filed, and there are limits on how much can be protected for the amounts deposited in the two years before that.

A transfer that can be clawed back in a Chapter 7 case will not be clawed back in a Chapter 13, but the Chapter 13 plan payments will have to be high enough so that the unsecured creditors get at least as much as they would have received had it been a Chapter 7. In other words, your plan payment will probably have to be increased to make up for the fact that the asset is there.

One thing I see people often doing is having their pay check deposited into somebody else’s bank account. Perhaps this is to avoid a creditor who has already cleaned out the debtor’s own bank account. You might or might not have a serious problem with your bankruptcy case if this has been going on, depending on all the circumstances. Best policy is to just to not do it.

I can’t tell you how many times I’ve been told “well I’ll just sell that (boat or motorcycle or whatever) to my brother for a dollar.” That won’t work. Rest assured that this loophole was plugged a very long time ago. That’s not exactly an original idea. When you sell something to someone right before filing a bankruptcy, who you sold it to and for how much has to be disclosed. Your relationship if any with the purchaser also has to be disclosed.

There are various exceptions – loopholes if you prefer – to most of the items I have been talking about here. You need to talk with your lawyer about whether what you did in your circumstances is going to be a problem or not. If you are contemplating bankruptcy, talk with your lawyer before making any significant financial movers. I hate having to say “gosh I wish you had talked with me before doing that.”

Why Everything Has to be Disclosed when Filing Bankruptcy

Time in federal prison

I recently noticed a familiar name and face in an article in the Star Tribune.  The headline was “Minneapolis Bankruptcy Trustee Smelled a Rat and Got the Goods on Jewelry Store Owner,” an article by reporter Randy Furst.  The article describes a situation  where a gentleman, Daniel Rohricht, apparently closed his jewelry store, went out of business and filed Chapter 7 bankruptcy.  This was about four years ago.  The debts listed in the bankruptcy came to over $250,000.

Mr. Rohricht claimed that all the jewelry was gone, having all been sold.  The bankruptcy seemed to go well.  One of our local bankruptcy trustees, a lawyer named Nauni Manty, was appointed as the trustee handling the case.  Ms. Manty knows a lot about jewelry and the jewelry business, but there was no evidence that anything was being hidden.  It is the trustee’s job to find assets for the creditors.  But after doing what investigation she could, she accepted a settlement of $17,500 from Mr. Rohricht.  The settlement agreement stated, however, that if Ms. Manty became aware of any undisclosed assets, the deal was off and they were back to square one.

Years passed, but Ms. Manty did not forget Mr. Rohricht.  Eventually she got wind that he had purchased a store in Wisconsin and had gone back into business.  She was able to prove that the jewelry and precious stones that he was hauling into the new store were items he had hidden in 2009 prior to filing his bankruptcy.  To make a long story short, he recently pled guilty to concealing assets and is now facing federal prison and a very large fine.

It’s not unusual that I will run into a person who has something he or she doesn’t want to disclose in their bankruptcy case.  They tend to believe firmly that it is something nobody would ever find out about.  That’s what Mr. Rohricht thought too.  I get asked why whatever it is must be disclosed.  Here’s why.  My understanding is that every year in Minnesota on average two or three people are convicted of bankruptcy fraud.  It’s never happened to any client of mine, and I really want to keep it that way.

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