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.
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.
The Minnesota bankruptcy filing statistics are out for the month of March. Year over year, March of 2019 shows 70 fewer bankruptcy filings than there were in March of 2018. In March of 2018 there were 998 bankruptcy cases filed in Minnesota, but this year in March 2019 it was only 928. March has always been the month in which the greatest number of case are filed – in my opinion that’s because people have tax refund money they can use to pay their lawyers. Why is it down this year? My best guess is it”s those lower tax refunds everyone has been talking about. I see my clients having bigger pay checks because their withholding is less, but they are also having lower tax refunds. Since tax refunds are considered to be an asset, a lower refund can be a good thing once the bankruptcy case is filed.
If you’ve been reading any of my musings, you know that when you file a Chapter 7 bankruptcy, ownership of all your stuff is temporarily and theoretically transferred to a trustee appointed by the court. I say “theoretically” because normally the trustee doesn’t get to keep any of it, or at least gets to keep very little. The reason why the trustee can’t keep your assets is that – with the help of somebody like me – you are going to claim all or most of your stuff as exempt. There are two sets of exemptions in Minnesota to choose from: the federal exemptions and the Minnesota state exemptions. The federal exemptions tend to be much better than the Minnesota state exemptions, except in one area: equity in a homestead. If you own your home and you have more than just a little equity in your home, the Minnesota state exemptions are for you.
Several of the Minnesota exemptions are indexed for inflation. The resulting increases are only applied every few years. 2018 was one of those years. The new indexed numbers went into effect on July 1st. For example: the household goods exemption increased from $10,300 to $10,800; for wedding rings the exemption increased from $2,817.50 to $2,940 in value; for life insurance proceeds it increased from $46,000 to $48,000; and the tools of the trade exemption went from $11,500 to $12,000. The most significant increase in my opinion was the homestead exemption which went from $390,000 of equity to $420,000 of equity.
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.
I’m not a paperless kind of guy. Hard copies of everything in a file folder. That’s how I like to do things. This of course means that I generate a lot of paper, and every few years I run out of storage space. After a Chapter 13 or Chapter 7 case is completed, the discharge has been granted and the clerk’s office has closed the case, I move the file to a storage room in the back of my garage. To me those files represent a lot of work, care, concern, blood and sweat. Gosh I hate to get rid of them. But a time comes when one has to let go. One has to admit that those people really did get a fresh start, they don’t need me any more, and it’s really time to move on and let go – physically let go of the file.
So it was with mixed feelings recently that I called Proshred, a locally owned shredding company near me. Prior to their arrival on the appointed day, I spent probably at least 20 hours going through all my old files deciding what it was safe to shred and what I had better still keep. I don’t remember for sure when I did this last, but I noticed right away that for the most part the oldest files I had dated from about 2006. What I finally wound up with was a big pile of bankruptcy files ranging from about 2006 to about 2012 in the middle of my garage floor. There was no left room to park.
When the truck arrived as one would expect, the driver who was supposed to do all the loading work had just had back surgery. He showed me the scar. I was planning on helping him anyway, but it turned out to be more like he was helping me. The files were moved from my garage to the truck using a full sized 64 gallon garbage can on wheels. It took about eight trips. I suppose that means I had about 512 gallons of files. Never thought of measuring my work by the gallon before.
I could hear the shredding blades doing their work right there at the end of my driveway. Kind of a strange or odd end to all that concern and pain I thought. It was comforting to hear from the driver that the remains of the files were going to be recycled and would eventually be used to make new paper at a mill somewhere near Duluth. As the truck pulled away I felt a bit of sadness, followed by a feeling of lightness and relief.
I recently posted on Google Plus about how certain things tend to be toxic to a possible bankruptcy. The most common one I see is a Harley Davidson. Other items in this category would include boats and horses, especially if they are fancy and not paid for. This statement resulted in questions being asked about exactly what I meant. If the problem is that a Harley, a boat or a horse are assets which would be lost in a Chapter 7 bankruptcy, then wouldn’t it be better for them to not be paid for. If they weren’t paid for, after all, they wouldn’t be much of an asset.
My answer was that such items make a bankruptcy difficult whether paid for or not. If they are paid for, they are assets that very likely would be lost in a Chapter 7 or would increase the required payments in a Chapter 13.
If they are not paid for, you have a situation where the Debtor will want to tell the bankruptcy trustee that he or she can’t afford to pay debts, except that somehow they CAN afford to keep paying for the Harley, the boat or the horses. This does not play well. The only thing to do if they really need the bankruptcy is to sell or surrender before filing, or state in the bankruptcy petition an intention to surrender the items after the case is filed.
Many have been the times when I have had a potential client disappear never to be heard from again when I said that the Harley has to go. There’s a whole subculture where any kind of misery is preferable to giving up the Harley. Boats are usually a bit easier to let go, but horses are also very hard to give up.
One exception might be a case with a 100% Chapter 13 plan. That would be a plan where 100% or the unsecured debts are to be paid. Since the bankruptcy trustee can’t ask for more than 100%, the Debtor would have more wiggle room when it came to something like keeping a motorcycle. Even then the trustee would not like it, but more than likely the trustee could not prevent it. I see very few cases where the payout is 100%. Most people who can afford to do that don’t need a bankruptcy.
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. I help people file for relief under the federal bankruptcy code.
Here verbatim is a consumer warning I have been asked to post from the National Association of Consumer Bankruptcy Lawyers.
Telephone-Scam Soliciting Wire Transfers Prompts NACBA and Vermont Attorney General to Issue Consumer Warning
Across the country, consumers are falling prey to a new scam targeting people who have filed for bankruptcy and others just getting started with the process. Bankruptcy attorneys are joining forces with public officials to sound the alarm bell to unsuspecting consumers.
The con artists are using software that “spoofs” the Caller ID system so that the call appears to be originating from the phone line of the consumer’s bankruptcy attorney. Victims of the scam are being instructed to immediately wire money to satisfy a debt that supposedly is outside the bankruptcy proceeding. Some consumers have been threatened with arrest if they fail to wire money to pay the debt.
In some instances, the perpetrators are using personal information from public filings to identify consumers, assume the identity of their attorneys and sound more convincing by phone. These calls are typically placed during nonbusiness hours, making it difficult for clients to verify the call by getting in touch with their attorney to ask about it.
The National Association of Consumer Bankruptcy Attorneys (NACBA) and its individual members want consumers to know that under no circumstance would a bankruptcy attorney or staff member telephone a client and ask for a wire transfer immediately to satisfy a debt. Nor would the bankruptcy attorney and staff ever threaten arrest if a debt isn’t paid.
Consumers should be advised that legitimate debt collectors and agencies cannot threaten arrest in order to satisfy. If you or a family member receive this kind of call, the best thing to do is to hang up and contact your bankruptcy attorney as soon as possible. Do NOT give out any personal or financial account information to the caller.
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.
During the holidays several of my clients received their bankruptcy discharge. The discharge is a court order which states that the Debtor is no longer legally obligated to repay most if not all of his or her debts. In most cases the only debts that are not discharged are student loans and taxes. Sometimes even taxes can be discharged, but that’s a topic for another blog post.
When that discharge comes out, many of my clients thank me profusely. For some reason I often have a hard time accepting thanks. When I was growing up I think it was part of the culture to assume that when somebody was just doing their job, there was no need to thank them. And if somebody thanked me I tended to say “no need to thank me” or “it was nothing” or other similar words which more or less blew it off. Later in life I learned that such responses diminish the importance of the gratitude being expressed and the person expressing it, and a simple “you’re welcome” is a much better way to respond.
Gratitude is one of the most noble of feelings and it should always be acknowledged – still it remains hard for me to do. Even so, with the client’s permission I’d like to share with you the following somewhat poetic excerpt from an email I received from one of the clients who recently got that discharge:
“This is the best holiday present ever!
That difficult experience of the past few years can now finally be a ghost….So many sleepless nights.
Thank you David for helping us to straighten out our lives..
We still have a hard road a head to try to prepare for being too old to be employed…
It would have been impossible with the mess we were in and it is still a long shot but we do have better odds now.
You were our guiding light and we will always be grateful.
Many many thanks to you David, …….”
I tend to get a little emotional around the holidays anyway, but this email really touched me.