Things to Avoid Before Bankruptcy: Item 4 – Drawing Down Your 401K

Things to Avoid Before Bankruptcy Item 4

By David J. Kelly, Minnesota Bankruptcy Attorney

As I’ve been saying, I have a list of what I consider the top seven things you should avoid before filing a bankruptcy, either Chapter 7 or Chapter 13. This is the fourth in a series and is about item four on my list – drawing down your 401K. Items One, Two and Three on my list are discussed in previous blog posts.

In general, money in a 401K is safe from your creditors and safe from the bankruptcy trustee. This is ordinarily also true for IRA accounts as well. Some exceptions have developed recently for accounts that are being transferred as part of a divorce and for accounts that have been inherited – but these are fairly rare problems. Usually a 401K or an IRA is the safest place your money can be. I am very sad when right before coming to see me, somebody cleans out their retirement account.

Most often I see they money used in an attempt to pay down debts. It is almost never enough. Soon the money is gone, and because of finance charges and high interest rates, not much of a dent has been made in the debt load. Other times people withdraw the money because they are afraid creditors will get it – which is sad because with the possible exception of the IRS or the child support people, creditors can’t touch it.

As a general rule, if you are deeply in debt, you should talk with a lawyer before making any serious financial changes.

I am a debt relief agency. I help people file for relief under the federal bankruptcy code. This video does not create an attorney-client relationship and is not legal advice. It is for general information purposes only. The details of your case can make a big difference as to whether or how the contents of this video apply to you.

Dave Kelly

Things to Avoid Before Bankruptcy: Item 3 – Large Payments to Unsecured Creditors

By David J. Kelly, Minnesota Bankruptcy Lawyer

If you’ve been reading my stuff, you know that I have a list of what I consider the top seven things you should avoid before filing a bankruptcy, either Chapter 7 or Chapter 13. This is the third in a series and is about item three on my list – making large payments to unsecured creditors.

The bankruptcy code follows the general principal that all your creditors are supposed to be treated equally – damaged equally in proportion to the amount of each debt.  To try and level the playing field among the unsecured creditors, a limit is set on how much you can pay each one within the 90 days before the filing of your case. If you have paid a total of over $600 to any one unsecured creditor in the 90 days prior to filing the case, this is considered what they call a “preference.”  Having a preference can slow down the administration of your case, not to mention that making those payments is a waste of your money.  Save the money to pay your attorney fee and court filing fee.

A preference is considered to be one of your assets, but it’s not one you can claim as exempt. In a Chapter 7 bankruptcy case having a preference means that the trustee can claw the money back from the one creditor and distribute it equally to all the creditors. While this process is going on, your court file remains open and you are not able to start rebuilding your credit. In a Chapter 13 bankruptcy it means you may have to pay extra in your payment plan to make up for what the creditors would have received had it been a Chapter 7. In Chapter 13 they call that the best interests of the creditor rule. You can’t give the unsecured creditors less in a Chapter 13 than they would have received in a Chapter 7. Either way, whether it’s Chapter 7 or Chapter 13, the result is undesirable.

Once a case is filed, my goal is always to get out of the case as quickly as possible. So a preference is usually something I want to avoid. They way to avoid the issue to quit paying the unsecured creditors and wait until you have a 90 day period free of preferences. There are always exceptions. The preference might not be the worst thing in the world. For example, if there is a wage garnishment in progress I might say let’s get the case filed ASAP anyway.

When asked my clients almost always say that they have not paid over $600 to any unsecured creditor in the last 90 days. But then I point out that all you have to be doing is paying over $200 per month, and that will always add up to over $600 in 90 days. At that point a light bulb seems to come on and I learn that there is a preference hiding there somewhere.

Keep an eye out for the next episode – Item Four – Drawing Down your 401K.

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.”

Things to Avoid Before Bankruptcy: Item 1 – Repaying a Debt to a Close Friend or Relative

Protect your friends and relatives

By David J. Kelly, Minnesota Bankruptcy Lawyer

It has always seemed to me that most of the things you SHOULD NOT do before filing bankruptcy are things that in ordinary circumstances your mother would say that you SHOULD do. If you are thinking of filing a bankruptcy, it’s time to consult your lawyer and not your mother or friends or relatives.  The sooner you consult a lawyer the better.  The bankruptcy code is full of hidden traps and gotchas. 

This is the first in a series of seven blog posts about things to NOT do if you are considering filing a bankruptcy in Minnesota. This post discusses payment of a debt to an insider – usually that means a close friend or relative. It can also include a business partner or associate.

In a Chapter 7 bankruptcy amounts repaid within a year before the bankruptcy is filed on debt owing to an insider can be clawed back by the trustee. In Chapter 13 bankruptcy you have to pay extra money into your plan to cover what the trustee could have clawed back had it been a Chapter 7. Either way, this is something you want to avoid. There is a fix for the problem, but you might not like it: obtaining another loan from the person you repaid in an amount in excess of the amount you paid.

The last thing you want after your bankruptcy case is filed is for your mother or brother to receive a letter from the trustee demanding return of money you paid them.  You get the same result if you pay a debt owing to an insider by giving the insider a benefit indirectly.  Here’s a common example of how this can happen.  Let’s say you need to buy a car but you can’t get a loan to do so.  Your brother does a cash advance on his credit card and loans you the money to buy the car. Every month you make a payment on the credit card that is in your brother’s name.  In a Chapter 7 bankruptcy the trustee can go after your  brother to recover all the payments you made on that credit card within the year before filing.  In a Chapter 13 you may have to pay larger payments to cover for the amount you repaid in your brother’s name.

I always hate it when I learn that my client or potential client has just done something that is really going to make the case difficult.  The rule seems to be that they always do it just a few days before coming in to see me.  If only they had talked with me before doing that!

If this sounds complicated it is. If you are thinking of bankruptcy it is best if you consult a lawyer before you make any financial moves. I would be glad to discuss the details of your case. Call me at 952-544-6356.

Bankruptcy Attorneys Provide an Essential Service

By David J. Kelly, Minnesota Bankruptcy Lawyer


Bankruptcy attorneys are considered to be an essential service. While I have been taking plenty of precautions, such as asking everyone to wear a mask, I am still here and ready to serve. It usually takes several meetings between myself and my clients to properly prepare a case for filing – but many of those meetings can be done by Zoom or telephone or one of the other remote communication platforms. You don’t have to wait. I would be glad to start working with you now. To begin, call me for a free telephone consultation. 952-544-6356.

Don’t Delay Filing Your Tax Returns

By David J. Kelly, Minnesota Bankruptcy Attorney

I have not been keeping track but it seems to me that somewhere around 20% of the people who call me are behind in filing their tax returns.  I’m not talking about filing for an extension first and then filing the return by the extended deadline.  I’m talking about not filing anything at all. The usual reason for not filing a required return is that the tax return showed that they owed taxes and they lacked the money to pay the taxes.  I do not claim to be a tax expert, but I can tell you that it is almost always better to file your tax returns on time even if you don’t have the money to pay the tax. If you don’t file the return, you still owe the tax.  Not filing doesn’t make the tax debt go away.  It just delays the inevitable and possibly gets you in trouble. There can be late filing penalties as well as late payment penalties.  Filing on time at least avoids the late filing penalties.

I have learned that it is a really bad idea to file any kind of a bankruptcy if my client’s tax filings are not up to date first.  In a bankruptcy petition we are required to provide a summary of income for three calendar years. I usually just take that information off my client’s tax returns.  We are required to list all your debts and all your assets.  If you have a refund coming, that’s an asset.  If you owe taxes, that’s a debt.  It is nearly impossible to properly list your debts and assets without having all required tax returns completed and filed first.  Without the tax returns the basic information required about assets and debts is incomplete.

It is usually fairly easy to set up payment plans for back taxes owed with the IRS and the Minnesota Department of Revenue.  Just pick up the phone and call them.  You will probably find them very easy to work with.  And if we are having trouble showing that you are broke enough to qualify for a Chapter 7 bankruptcy, the payment plans with the IRS and the Department of Revenue make very handy items to add to your monthly budget.  To qualify for Chapter 7 it is best if your money is all gone by the end of the month.  If you have a little left over at the end of the month, you probably  won’t after you set up your payment plans.    

Medical or Dental Bills in a Minnesota Bankruptcy

List medical bills in bankruptcy

By David J. Kelly, Minnesota Bankruptcy Lawyer

Often my clients have a therapist, doctor, chiropractor or dentist whose bill they don’t want to list in their bankruptcy. This could be a person that they really like and with whom they have a relationship that goes back several years. I hate to have to explain that one cannot pick and choose which debts to list. You are required to list them all. For some this can be a source of embarrassment an sadness. The primary concern is that maybe they won’t be able to return to that particular provider for further care or treatment. I am glad to be able to report to you that at least here in my area, this has not seemed to be a problem.

Thee is nothing in the law which requires health care providers to continue to provide services or treatment for a Debtor after a debt owing to them has been listed in a bankruptcy, but my experience has been that almost all of them will. For one thing, any health insurance coverage the Debtor has remains in effect. The bankruptcy only affects the part of the bill not covered by insurance. With some rare exceptions – such as one dentist in Elk River and a Veterinarian in Wayzata – the policy of most health care providers around here is that they will roll your bill back to zero as of the day the bankruptcy was filed, and the start over from there.

The health care providers are usually very nice about it. If you have been a regular patient, they know you will keep going back and be a continuing source of business for them. Often the bill you are listing is a small portion of what the original charges were, because a large portion was covered by your health insurance. Typically from their point of view your bankruptcy hardly hurts them at all. Often they will say something like “sorry to hear of your troubles – we hope that all works out for you.”

Bankruptcy & Social Security Overpayment

By David J. Kelly, Minnesota Bankruptcy Lawyer

I want to say a few words about whether a debt owing to the Social Security Administration for overpayment of benefits can be discharged in a bankruptcy.  Often it can be.

If you have received Social Security you know that several factors, many of them beyond your control, can affect whether you are eligible and for how much.  This is especially true of disability benefits.  A change in status can end your eligibility or reduce the amount. It’s all very complicated and hard to understand – especially if you are ill.

The Social Security Administration is a big and cumbersome organization that makes lots of mistakes.  Lots of times they pay benefits when they are not supposed to.  Often this happens because they can be very slow in processing information they receive from beneficiaries.  The impression I have is that most beneficiaries are very careful about complying with requirements that they report any change in their circumstances.  If you report the change and the benefits keep coming, most people would assume that the change didn’t make a difference.  Later, however, you may be shocked to receive a nasty letter from the Social Security Administration.  The letter claims that you have been overpaid and demands repayment.

Suddenly you have a very large debt to a federal government agency.  Nobody is more powerful. They might start withholding from the benefits you are still eligible for; they might seize your tax refunds; or they might even start garnishing your wages.  Most people assume that like the usual student loans and taxes, there is no way to make this go away.  This is what I assumed too the first time someone came to my office with one of these letters.

I was surprised to learn when I did a little research that many if not most of these Social Security overpayment claims can be discharged in bankruptcy.  When a debt like this is listed in a bankruptcy, it is going to be discharged unless the Social Security Administration successfully objects.  In order to figure out whether to expect an objection, it is helpful to check Social Security policies as published in their on line Program Operations Manual.  The guidelines as to when such an objection should be filed are in GN 02215.196 of  the manual.  They will object if they believe they can prove that the overpayment was a result of fraud or misrepresentation.

They use a three part test to define what they mean by misrepresentation.  There must have been 1) an overpayment caused by false representation, 2) made with the intent to deceive and 3) upon which the Social Security Administration relied to it’s detriment.

The typical person I see in my office who with one of these overpayment letters isn’t anywhere close to satisfying the above test.  This person hasn’t told any lies and certainly wan’t trying to deceive anybody.  There was no intent to cheat the government out of anything.  It was more a matter of just stumbling into the situation.  If this is where you find yourself, you might want to give me a call.  The chances that a bankruptcy can make the whole problem just go away are very good.

Minnesota State Exemptions Still Leaking Assets Like a Sieve

At least this old radio is exempt

By David J. Kelly, Minnesota Bankruptcy Attorney

When you file a Chapter 7 bankruptcy, ownership of all your assets all the way down to your socks passes to a trustee appointed by the court.  The only way to avoid losing your shirt and most everything else you own is to claim the assets as exempt.  If you qualify to use the federal exemptions, it is very likely that everything you own will be exempt and you will keep all your assets.  That’s the result I always want to see – my client gets rid of his or her debts but keeps all his or her stuff.

The only problem with the federal exemption list is that it has a low number for the amount of homestead equity which can be exempted.  If  someone has more equity than can be protected by the federal exemptions, the only other choice is to use the state exemptions.  The Minnesota state exemptions will protect up to $$390,000 of equity in a homestead, but other than that those exemptions leave a lot to be desired.  They are hopelessly out of date in many respects.

For example, the only electronics clearly allowed as being exempt are a radio, a phonograph and television receivers.  Notoriously, computers are not exempt.  Neither are cell phones, tablets, game machines, printers, monitors or any other device that isn’t a TV, radio or phonograph.

There’s no exemption for jewelry, unless it’s a wedding ring that was actually present at the wedding ceremony.  There’s no exemption for guns, sporting goods such as bicycles or exercise equipment, or collectibles of any kind.  Household furnishings, clothing and appliances are exempt, but a riding lawn mower is not considered to be an appliance.  Money in your checking account or savings account is not exempt unless it can be traced to a pay check from employment which was deposited within the last 20 days.  There’s no exemption for any kind of a tax refund which may be owing or which may have accumulated as of the date of filing the bankruptcy.  Bankruptcy trustees routinely present my clients with a form which signs over their tax refunds.

Several weeks ago two bills were introduced at the state legislature in St. Paul to try and correct some of this.  One of them added exemptions for the following, all of which currently are absent from the exemption list:

  • Computers, tablets, printers and cell phones as part of the household goods exemption
  • Jewelry up to a value of $2,817.50 – replacing the existing wedding ring exemption
  • A new section exempting $3,000 of tools, snow removal equipment and lawnmowers
  • A wild card exemption which could be used for up to a $1,250 value of property not fitting into any other exemption; and
  • Health savings accounts (HSA) and medial savings accounts up to a value of $6,500.

When I heard last week that the legislature had passed an amendment to the exemption statute, I got quite excited.  I thought it must be the bill I just described above.  I was quite disappointed to learn that it was another bill which only added one provision: an exemption for health savings accounts and medical savings accounts up to a value of $25,000.  It’s nice that the amount of the exemption is so high, but I almost never see anyone with an HSA which has any more than a few hundred dollars in it.

So except for the new exemption for the HSAs, we are still stuck with all the same old problems with the Minnesota state exemptions.  Oh well, at least the antique radio in my office is exempt.

 

Hard to Pay Those Troubling Holiday Shopping Bills?

Are holiday debts catching up wit you?

By David J. Kelly, Minnesota Bankruptcy Attorney

Around this past Thanksgiving CNBC published a report about how an alarming number of shoppers are still paying off debt from Christmas of 2016.  A lot of the data in the report came from a source called NerdWallet. It seems that holiday-induced  spending and debt is a growing problem.   24% admitted to overspending for the holidays of 2016.  Among baby boomers, 64% went in debt to pay for Christmas.  For Gen-X it was 58% and for millennials it was 40%.

When it comes to not yet having paid off the 2016 debt, the millennials led with 24%. Gen-X came in at 16% and the boomers were at 8%.

The advice offered by CNBC to help avoid going into debt over the holidays again is threefold:

  1. Make a good budget and stick to it.
  2. Keep an eye out for sales; and
  3. Pay debt back.

My reaction to this advice is to say to myself “well that’s easy for them to say.”  Credit card debt has a way of sneaking up on a person. Not everyone is capable of paying their debt back.  Many are overwhelmed and the bills that come in after Christmas can be the straw that breaks the camel’s back.

If you are looking at your holiday bills and other debts in shock, perhaps it is time to consider another alternative.  Once unsecured debt totals more than half of your annual income, it is usually impossible to get it paid back.  For you a Chapter 7 or Chapter 13 bankruptcy might be a good idea.