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.

Recent Increases for the Minnesota State Exemptions

Protecting your home and your stuff

By David J. Kelly, Minnesota Bankruptcy Attorney

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.

For more info about exempting your property so the bankruptcy trustee can’t have it, look at my exemption page.  For a rant about what’s wrong with the Minnesota state exemptions, please take a look at my post Minnesota State Exemptions Still Leaking Like a Sieve.  You might also want to take a look at this video:

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.