Children’s Bank Accounts At Risk in Chapter 7 Bankruptcy

Kid's savings accounts

By Dave Kelly, Minnesota Bankruptcy Lawyer

Recently a potential client made a hasty exit from my office after I explained that the accounts that had been set up for the children could be at risk in a Chapter 7 bankruptcy. What kind of account you set up for your children, how much you put in it and when can all make a big difference. I feel a blog post on this subject coming on. At least one post, maybe two. If you have bank accounts for your children, be sure you tell your lawyer about them.

Please note that in this article I am talking only about Chapter 7 bankruptcy. Chapter 13 bankruptcy is a whole other topic. Some of the problems described here could be more easily resolved in a Chapter 13.

529 College Savings Accounts

A 529 savings account may be the safest way to save money for your children’s college. Much like a 401K, the money you put in should be tax deductible. Such accounts are not always protected when you file bankruptcy. You have to look at how much you deposited and how long ago that was.

Any amount deposited more than two years before filing the bankruptcy should be protected. Funds that were deposited between two years and one year before the filing date are protected up to $6,425. Any more than that belongs to the bankruptcy estate and probably will be claimed by the bankruptcy trustee. AND any amount deposited within one year before filing the bankruptcy is not protected at all. Again, that amount will be claimed by the bankruptcy trustee.

Uniform Transfer to Minors Act (UTMA) Accounts

These are accounts set up under state law. The account is in the child’s name and is held under the child’s social security number. In your bankruptcy papers it would typically be listed under property held for another. The law requires, however, that an adult be named as the custodian of the account. The adult will manage the account until the child turns 18, then the money can be claimed by the child. How safe or unsafe the money in one of these accounts is depends on when the money was put in and by whom.

As a general rule, if the money in the account came from Grandma or some other third party, it should be safe. Because it never was your money. It would be best if you had records that can prove it never was your money. If you put the money in and now you want to file a bankruptcy, there could be a problem. Minnesota has a fraudulent conveyance statute that has a six year look back period. If that was money that you could have used to pay your debts but you put it in the child’s account instead, the bankruptcy trustee might be able to claw it back out of that account.

Joint Savings Account with Your Child

Of the accounts I am talking about here, this could be the most difficult kind. Your name is on the account along with the child, so how do your prove it’s not yours. For one thing it has to be listed in the bankruptcy petition along with all the other accounts your name is on. If the money did come from you, there is the same “fraudulent conveyance” problem I mentioned above. If the money came from a third party, however, like Grandma, I hope you have good records to prove that. Minnesota does have a statute that says money in a joint account belongs to the person who deposited it. If the money never was yours and you can prove it, the account is probably safe. It would help if the amount is relatively small. The larger the balance, the more likely it is that the trustee would try to make an attempt to grab it.

What if the Money in the Account is from Social Security?

Some children receive a Social Security benefit because their parent has died or or disabled. This money, however, is supposed to be available to the child’s custodian to pay for the child’s living expenses. Social Security money is generally exempt and can’t be touched. But it better be in an account where you can prove that’s what it is. Assuming you are the child’s custodian, it would be best if you were using at least some of it for the child’s expenses. If you just bank the whole thing and never touch any of it, you could appear to not be making your best efforts to avoid bankruptcy. The trustee might not be able to touch the money, but I fear the trustee could object that the case is not being filed in good faith. No such objection has ever happened in any case of mine, but I can’t promise it would never happen if the facts were lined up as I just described.

Conclusion

I have had many cases involving children’s savings accounts fly through with no problem. But as you can see, there are a lot of ifs, buts and maybes concerning these accounts. Don’t assume you know what to do or how to handle these. You need to have the accounts reviewed by an experienced lawyer well in advance of any bankruptcy filing.

Better call Dave. 952-544-6356.

Welcome to My Youtube Channel

welcome to Dave's bankruptcy Youtube channel

By Dave Kelly, Minnesota Bankruptcy Attorney

Youtube recommends that every channel should have a welcome video. The video designated as the welcome video will be the first thing a person sees when they go to a particular channel. The video should be a short statement of what the channel is about and what information can be found there. My channel has videos going back to 2007; but until now there was no welcome video. I just uploaded it a few days ago, and here it is:

Information you can find on my Youtube channel includes but is not limited to the following:

Going to jail for debt
Bank accounts – which ones should be closed
Questions to expect at the hearing
Documents you will be required to produce
What about rental properties in bankruptcy
Property that is exempt
What does bankruptcy cost
Debt settlement programs
7 things to not do before bankruptcy
7 things you should consider doing before bankruptcy

You will also find a lot of information about how to qualify for bankruptcy and what kind of bankruptcy you might qualify for.

It looks like my videos are attracting quite a bit of traffic. Youtube is peppering my videos with all sorts of commercials over which I have no control and from which I don’t get a cent. In order to get paid anything at all from the advertising revenue, they require a lot more subscribers than I currently have. So please do me a favor. If you find my channel helpful at all, PLEASE SUBSCRIBE.

Fresh Increases in Minnesota State Exemptions

Exempt property claim form

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.

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.

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

Real Bankruptcy Lawyer

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

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

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

Credit report obtained by lawyer

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.

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

Taking Covid safety measures

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.

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.

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