Preparation and Planning for Filing Bankruptcy

Preparing Finances For Bankruptcy

Preparation and Planning for Filing BankruptcyWhen preparing a case for filing, I typically advise my clients that they should continue doing what they usually do financially speaking. Any change from the status quo tends to look suspcicious. It’s not a good time to make radical financial changes when you know that every move you make might be scrutinized. Sometimes, however, there is a circumstance or situaiton which we can see is going to create a problem if a bankruptcy is filed. When one has a situation like that, the question is whether something should be done to change things; or would it be best just to leave it alone. The ways and means of changing such things in such a way that the situation actually is made better instead of worse is known in my world as “bankruptcy planning.”

Recent court decisions indicate that some modest planning prior to filing a bankruptcy is permitted. But if you go too far with it, you risk all sorts of problems. So where’s the line? Well, it’s much more of an art than a science. I like to think I know it when I see it, but laying down hard and fast rules that will apply in every case would be hard to do. Before making any planning moves at all, if you have bankruptcy in mind, please get yourself face to face with a competent lawyer. I really hate it when my first meeting with a potential client comes a week after that person made a big mistake. I can’t count the times that I have said “I wish you would have come to see me before you did that.” In this blog post the best I can do is make a few general suggestions, things that would usually be correct, but not necessarily always correct.

FIRST, WHATEVER ELSE YOU DO, QUIT USING CREDIT CARDS

The newer the debt is, the more likely it is that there could be a problem getting it discharged in bankruptcy. If you are contemplating bankruptcy, using a credit card can be considered – I hate to use this word – fraud. The creditor may make a claim, usually as part of an adversary proceeding in the bankruptcy court, that you knew or should have known that you were never going to be able to repay the debt. Worse yet, the creditor might claim that you flat out intended to never repay. Any use of one account that totals over $500 or so within the 90 days before filing can bring on an objection from a creditor; under the 2005 law this is a circumstance that is presumed to be objectionable. Large purchases or charges or balance transfers within six months or so prior to filing also tend to draw an objection. Purchases or charges that took place more than six months prior to filing are not quite so likely to be objected to, but each circumstance is different.

When I am getting a case ready to file, I try to screen for transactions that might result in this kind of objection. If it looks to me that an objection is likely, a delay in filing is usually the solution. If the case is filed and an objection is actually filed, I may have to refer my client to an attorney who specializes in defending that kind of case. The retainer agreement I use specifically states that defending adversary proceedings is not included in what I am hired to do. Sometimes I can settle such a claim without referring my client to somebody else. There are also situations where my advice might be that there is no use defending because the case is a sure loser. An example of a sure loser would be a claim for overpayment of unemployment benefits. If a person accepted such benefits while they had a job, there is probably no way to defend. If it’s the kind of claim that just isn’t going to go away, often I can help my client negotiate a payment plan.

Sometimes the best solution is to file a Chapter 13 instead of a Chapter 7. In a Chapter 13 the creditors are discouraged from bringing nondischargeability claims because even if they win, they can’t collect on their win until after the end of the five year payment plan. During the five years they can’t collect any more than their share of what is being paid under the Chapter 13 plan. Some Chapter 13 plans provide for very low payments. Chapter 13 might not be as hard to live with as one might imagine.

DON’T TRANSFER, GIVE AWAY OR TRY TO HIDE ANYTHING

The bankruptcy statute has what is called a fraudulent transfer provision in it which goes back two years. Besides that, the State of Minnesota has a fraudulent transfer statute that goes back six years. These statutes allow the bankruptcy trustee to reverse certain transfers. The transfer reversal is often called a “claw back.” The problem is that there is a temptation prior to bankruptcy to get rid of assets so that the bankruptcy trustee can’t take them. Whatever form the transfer takes, if it was transferred as a gift or sold for less than full value, this property can be taken from it’s new owner. The two year bankruptcy statute covers just about any transfer that was for less than full value. This can include a transfer, or it can also include taking your name off a jointly owned asset. After all, when you take your name off a joint asset, you transfer half to the other owner. The six year Minnesota state statue has a requirement that the transfer have been for the purpose of hindering or delaying creditors, which means that after the first two years it is harder to show that a transfer was fraudulent. The bankruptcy forms you will have to submit ask a lot of questions about what you have sold, transferred or given away in the past two years. Selling something for fair market value is OK, but be ready to document that it was in fact fair value. The forms will ask what the item was, who it was transferred to and what you got in exchange.

“I don’t know” is not an acceptable answer to questions about where your money or assets went. The bankruptcy statute requires that before you file you must keep records sufficient to determine your financial circumstances. One of the things I often tell people who are contemplating bankruptcy is that they should start keeping receipts for everything. Receipts are especially important if you are using cash. We need to be able to explain where all your money went over the past several months before you file your case; and in some instances we have to disclose things that happened years earlier. My personal preference is that my clients run all their finances through a checking account, so there is a good record of everything that happened. There’s no rule agains using cash for everything, but I am always afraid that it looks suspicious.

If you have an account for your child into which you have been depositing funds on a regular basis, stop doing that. If you were thinking of giving your boat or your Harley Davidson to your brother or selling it to him for one dollar, don’t do it. If you have been repaying a debt to a relative, stop making those payments. Repayments of debt to a relative within one year of filing can be clawed back. Repayments to a regular unsecured creditor within 90 days of filing can also be clawed back if the total repayment duing that time is $600 or more. You might love your doctor, dentist, orthodontiist, therapist or chiropractor, but trying to get them paid off before filing the bankruptcy can be a wasted effort.

If someone recently gave you something which you are thinking of giving back, don’t do it. There’s nothing I hate more than having a bankruptcy trustee be able to seize an asset from a relative or friend of my client, when it happens that it was an asset that my client could have claimed as exempt and kept without a problem.

BE CAREFUL WHEN SELLING ASSETS AND SPENDING THE MONEY

As I suggested above, please don’t read this and then assume you know what to do. Consult a competent lawyer before you take action.

It’s not unusual for someone to come in to my office who has an extra car that can’t be exempted in a bankruptcy case, or some other non-exempt asset such as a boat or motorcycle. It there is a loan against the item, the easy answer might be to surrender it back to the lender. If there is equity in the item, selling it might not be a bad idea. As I mentioned above, with any sale the buyer’s name and address, the item itself, the date and the price must all be listed on the bankruptcy petition. In the event that it was something you listed on Craigslist and sold to a person who came by and did not identify himself or herself, I have gotten by with listing the buyer as “Unidentified purchaser from Craigslist.” When selling an item, you must be able to swear that the price was the fair market value. Usually such values are fairly easy to document with a visit to Craigslist or Ebay. It helps if the buyer was somebody you didn’t know rather than a friend or relative.

Of course when you sell something, what you have then is cash. Cash on hand – that is money that is not in the bank – still has to be listed as an asset in the bankruptcy petition. In my experience having too much cash tends to just not be as big a problem as a having hard asset item like a motorcycle that can’t be claimed as exempt. If there is too much cash, there may be acceptable ways in which it can be spent.  One of my favorite bumper stickers says “MONEY TALKS, BUT MINE ONLY KNOWS HOW TO SAY GOODBYE.” Most of my clients are in such dire financial circumstances that their cash can be compared to spit in a hot frying pan. It just doesn’t last long. Typically they need dental work, or their children need dental work, but they have been putting it off. I’ve also had clients who were delaying needed surgery, because they were using what funds they had to try and keep up with credit card payments. Another needed expense that gets put off is car repairs. This can include needed new tires or needed brake work. I’ve had clients living without hot water because they couldn’t afford a new water heater. Others are in serious need of a new refrigerator or dishwasher. Please consult your lawyer first, but often times purchases of such things are considered entirely appropriate because they are necessities of life. Buying needed clothing, groceries and filling up the cars with gas is usually also considered to be entirely acceptable. Paying your lawyer of course is always a good idea.

CONCLUSION

As I said above, this is more of an art than a science. It is very hard to state hard and fast rules that will work every time. Something that might work fine in one case can cause a very serious problem in another. Each case different. Variables abound. The bankruptcy statute is a mine field of “gotchas.” Whatever you may be contemplating when it comes to planning a bankruptcy, don’t do it until after you thoroughly discuss it with your lawyer. And when it comes to choosing a lawyer, I suggest you find somebody who has been around for a while.

Disclaimer

This blog post is for general information purposes only and does not create an attorney-client relationship. It is not legal advice. Please consult the attorney of your choice concerning the details of your case. I am a debt relief agency helping people file for relief under the federal bankruptcy code.

Big Meeting Tonight

The state bar association bankruptcy section is meeting tonight. The topic will be lien stripping.

Judging just from the announcements concerning tonight’s meeting, a bit of controversy seems to be brewing. At first the topic was announced as how to lien strip or words to that effect. Then the topic was changed to something like “a discussion of the pros and cons of lien stripping.”

I believe that sooner or later the process of lien stripping will be commonplace in Minnesota. Right now the procedure still seems a bit unsettled. I’ll have more to say after tonight. Perhaps my opinion will change. I would probably be willing to try it if I had the right case.

Student loan horror stories

Two student loan horror stories:

Story No. 1. I’ve heard back from one of my former clients that student loans are now harder to get than they were before filing. In fact, that particular person seems to have been cut off entirely from student loans. It means for that client, who happens to have been employed as well as in school, that money will have to be set aside in advance before going back to school. So there is an unexpected delay in educational plans. It may be significant that this was a person who was relying on private student loans, not government student loans.

There’s what appears to be good article on the subject of bankruptcy and student loan eligibility at finaid.org. They say that bankruptcy should not effect eligibility for government student loans, but that it is common for there to be a problem with private student loans. This might explain why I haven’t been hearing from most of my clients or former clients about any such difficulties. I believe that most of my clients, if they do have an ongoing financial aid program at a college or school, are using government lenders not private lenders.

Story No. 2. Again, it’s a problem with a private lender. Client is no longer in school, but has a student loan and wants to keep paying. However, for several months now the client has not been able to find anybody who will accept the payment. There seems to be a musical lender shell game in progress. After the bankruptcy filing, the original lender seems to have transferred the loan to another institution. The new lender seems to have transferred it again, but the client can’t seem to find out where. I’ve made some calls about it, but it seems impossible to get a real person. When one does get a real person, they just say you’ll hear from someone soon. But so far that’s not happening. Frankly I wonder if someone has lost the file. The problem is of course that student loans don’t ever really go away, and sooner or later this thing is going to pop up with somebody demanding payment. And I’m sure whoever it is won’t be forgiving any of the interest that has been accumulating during this time that the loan seems to have disappeared.

I’ve been telling my clients that if they will be needing more student loans after we file, then they better check with the lender and their financial aid office at school to try and get a preview in advance as to what the effect of the bankruptcy might be.

Best Minnesota Bankruptcy Attorney?????

I just got off the phone with a guy who claimed that he found me by typing “best minnesota bankruptcy attorney” into google.

I just tried it. Sure enough, my web site comes up first – at least in the organic results. I’m not counting the paid advertisements, just the regular search result listing.

I have no idea how this would happen. Some sort of a fluke I would suppose. I do my own web site, but I have made no effort to promote the word “best” as any kind of a key word. I might mention somewhere on the site that I use software called “Best Case.”

So that’s my curiousity of the day. I’m sure that result won’t continue for long. More later.

To the Guy I was supposed to call back around 12:30 PM Today

Your phone is disconnected. I tried to return your call at 12:30 pm today as I said I would; but between the time you called me around 10 am today and the time I tried to return the call, you apparently were disconnected.

Please try to call me again when you can. I know they say that the recession is behind us, but the fact your phone got disconnected today would seem to indicate that it is not over for you.

While not on the same level of magnitude, this reminds me of the time – not that long ago – that a repo guy towed my client’s car away from the parking lot in front of my office.

More later.

Loan Modifications, Meteorites and the StarTribune

Not long ago I was meeting with a client who was pursuing the mortgage modification process through the federal progam known as HAMP. We were close to filing a bankruptcy; and my client expressed concern that if the modification came through, the lower house payment would mess up the budget numbers we were about the file with the bankruptcy court.

I don’t ever mean to be rude. I certainly hate to discourage people. Sometimes I need to apoligize to my clients for the things I say. Sometimes I even try to apologize in advance, because the nature of what I need to say could be offensive – not to mention that my sense of humor is really backwards too.

BUT – without any advance apology – I told this particular client that I believed the chances of getting the mortgage modification were about the same as the chances of being hit by a meteorite.

I don’t claim to be an expert on mortgages or finance. I don’t provide legal advice on that subject. It’s enough trouble for me to keep track of the bankruptcy laws. A large number of my clients, however, have tried on their own to do these mortgage modifications. My estimate of his chances of success were based only on what I have seen others go through, not on any direct knowledge or expertise. Almost nobody I have known has ever been successful. Two clients, maybe three, have actually succeeded.

I was reminded of my talk with that client when I read the headline story about mortgage modifications in yesterday’s Sunday StarTribune. They had a front page story that continued in a full page layout on one of the inside pages. The reporter described multiple incidents where the lender encouraged borrowers by temporarily lowering payments, only to announce a year or so later that the modification was denied. Suddenly all the formerly reduced payments became due and payable immediately. Foreclosure often followed.

I have spent more time than I should have just now trying to put a link to that StarTribune story into this blog entry. I guess it can’t be done, because that article is designated as “premium content.” Its only available to subscribers. I could carry on at length just about that, but I better shut up now.

No, I’m not associated with "Legal Helpers"

I got a fax yesterday from someone who said he had been given my name by an outfit called “Legal Helpers.” He said they were not attorneys and that they were helping him prepare his own bankruptcy without an attorney. He seemed to think that somehow I was associated with them. Please let the record reflect that I am not.

I have nothing to do with them. In addition I want to say that anyone trying to file their own bankruptcy without a lawyer is taking a very serious risk. To anyone who is trying to do that: please don’t rely on anything I have posted on my web site or anywhere else. Nothing written or provided by me is intended for do-it-yourself use, and trying to use my material that way could lead you to disaster. My web pages are nothing but a few general comments, not intended to be any sort of an exhaustive treatise.

Lincoln said it: “He who represents himself has a fool for a lawyer.”

Median Incomes Drop – Judges Require New Checklist

Effective November 1st there are new median income numbers for prescribed by the US Trustee’s office. The only state I have looked at is Minnesota. I don’t know if median incomes rose anywhere else, but here they seem to have dropped significantly. I am now in the process of reviewing the cases I am working on to see if these new numbers will create a problem.

There are a few cases I was hoping to file before the end of this month. For most if not all of them there is still something I need my client to provide, such as a counseling certificate, before the case can be filed. I will be trying to contact all of those clients to emphasize how important it is to not delay. Even if you can get by with the new numbers, the cases will certainly look better if we can use the old pre-November median income table. I have already posted the new median numbers on my Chapter 7 page.

I mentioned in my last post that the judges of the district were unhappy with many of the younger new lawyers who are filing bankruptcies but making all sorts of mistakes. They are also displeased to learn that many clients feel abandoned by their lawyers after the case is filed. The judges and the clerk of court are getting calls from debtors who can’t seem to get their lawyers on the phone. In other cases the clients have never actually met with the person who is supposed to be their lawyer, but have only worked with other staff in that lawyer’s office. To try to remedy some of this the judges have provided a new checklist – one for Chapter 7 cases and one for Chapter 13 cases. It lists what the lawyer is supposed to be responsible for and what the debtors are responsible for. Each list runs about five pages. A copy of both lists can be found on my site under a link labeled “responsibility forms.” I guess I don’t mind the forms, although they do create more work. I just wish they weren’t needed.

Two Days at the Bankruptcy Institute

Just spent all day today and all day yesterday at the Minnesota Continuing Legal Education’s Bankruptcy Institute. For me the best part was this afternoon, a presentation about the preparation and amendment of Chapter 13 plans.

It was also just good to reconnect with some of my fellow bankruptcy lawyers. Things are getting really complicated out there. Some of the judges and trustees were expressing frustration with a number of younger and inexperienced recent law school graduates who have not been acclimated to the level of professionalism that’s required. Apparently there is some concern that clients are being abandoned by their lawyers.

To try to combat this the judges of the district are about to order a new procedure – from my point of view just another form that must be completed before filing. This one is going to be a long list of duties and responsibilities – one list for the lawyer and the other for the client. It’s going to be food for conversation to say the least.

I’ll have more to say about the new form once I have actually started working with it.

More later.

Fall Colors on the Road to St. Cloud

I had a hearing (meeting of creditors) in St. Cloud this past Thursday. I go there fairly regularly, because that’s where the initial bankruptcy hearings are for residents of Wright County – and quite a few of my clients are from Wright County. I’m really not that far from the Wright County border. Particularly since the most recent straightening of Highway 12, getting here from places like Delano, Montrose and Waverly isn’t that hard.

That hearing was fairly early in the morning, and I got to look at the fall colors along I-94 in the early morning sun. I think the low angle of the sun in back of me as I headed northwest contributed to the drama. If those colors weren’t at their peak, it had to be about as close as I’ll ever see. Every time I came around a curve to a fresh view of reds and oranges, I was thankful that I had an excuse to be making that drive.

The hearings in St. Cloud are at the Red Cross Building on St. Germain St. It does not at all look like a court house. In fact I would say it’s a strange place to be having hearings like that. I had my camera in the car and I was thinking of taking some pictures of the place for my web site. By the time I was done with the hearing, however, I had forgotten about taking pictures. I was concentrating on the case to the point that I didn’t remember anything about the picture idea until I was half way back.

The drive southeast from St. Cloud allows one to contemplate the railroad which runs parallel to the freeway. Burlington Northern Santa Fe I think. Until a few years ago there were the remnants of some sort of railroad-related telephone or telegraph lines along that railroad. Every now and then as one drove along an old pole could be seen in the trees or bushes along the railroad with a few wires draped over it and hanging to the ground. Those seem to have all been removed now, because I don’t see them anymore. One time I spent a few minutes on Google trying to see if anyone had posted anything about the history of those old poles and wires, but I found nothing.

As a kid I remember that all railroads had lots of telegraph or telephone wires running alongside. It was explained to me, I no longer remember by who, that those were private railroad communication lines so they could keep track of where the trains were and keep them from running into each other. Obviously they’ve found a better way to communicate and don’t need the wires anymore. I’m curious about it, but I can’t seem to find a write up on this topic anywhere. If anybody knows of a good place to look for such info, please let me know.

Well, that was a good ramble. More later.