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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

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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.

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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.”

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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.

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The Spinnaker Award

Spinnakeer Award

By David J. Kelly, Minnesota Bankruptcy Attorney

This is off topic for a blog that focuses on bankruptcy, but it’s something I would like to share anyway. A spinnaker is an extra sail that is hung off the front of a sailing vessel to give it an extra boost, extra speed. It’s easy to understand why the Minnetonka School District has used that as the name for their award for outstanding volunteers.

I was surprised a couple of months ago when I received a notice by email that I was about to receive an award – complete with an actual trophy – for doing volunteer work for the Minnetonka School District. I almost deleted the email, thinking that it was just another scam. I get lots of spam email telling me that I have won an award or some kind of certification, but they almost always want me to pay a few hundred dollars for the honor.

Once it dawned on me that the email was real, I couldn’t think of what volunteer work they were talking about. Up until then, I wasn’t thinking of anything I do as being volunteer work for a school district. My daughter is a music teacher at one of the elementary schools in Minnetonka. About 15 years ago she asked if I would bring my video camera and record one of her school programs. After that I started, at her request, showing up and recording all of them for her. After she became director of one of the school district choirs, I started recording the choir programs too. The kids love to watch a video of themselves. It’s also a teaching tool.

Here’s a short clip of the virtual award ceremony:

I have always had a fairly nice video camera. Fiddling with video has been a hobby of mine. For one thing I needed a decent video camera to make clips for my Youtube channel. I never thought of videoing the school programs and concerts as volunteer work. It was just something I enjoyed doing and something that helped my daughter. She had started off by trying to obtain video which had been taken by some of the parents, but those turned out always to be overly focused on their own child. My daughter knew that I was capable of taking a fairly good video, because when she was a kid I was always there with a camera for her gymnastics events. Taking videos of the school events now that she was a teacher just seemed like a continuation of what I had always done.

My advice for anybody who wants to take a good video of a children’s event: get lots of close up shots of the faces. The kids always love to see themselves. Find a camera that has a good zoom lens and make plenty use of it.

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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.

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Covid-19 Update from National Association of Consumer Bankruptcy Attorneys

clorox lawyer

By David J. Kelly, Minnesota Bankruptcy Lawyer since 1976

Just received the following summary from the National Association of Consumer Bankruptcy Attorneys concerning bankruptcy provisions of the Coronavirus Aid, Relief and Economic Security Act” (CARES Act). Here’s what it did:

1. Amended the Small Business Reorganization Act of 2019 (SBRA) to increase the eligibility threshold for businesses filing under new subchapter V of chapter 11 of the U.S. Bankruptcy Code from $2,725,625 of debt to $7,500,000. The eligibility threshold will return to $2,725,625 after one year. Check out our SBRA Resource Page for more information.

2. Amended the definition of “income” in the Bankruptcy Code for chapters 7 and 13 to exclude coronavirus-related payments from the federal government from being treated as “income” for purposes of filing bankruptcy.

3. Clarified that the calculation of disposable income for purposes of confirming a chapter 13 plan shall not include coronavirus-related payments.

4. Explicitly permitted individuals and families currently in chapter 13 to seek payment plan modifications if they are experiencing a material financial hardship due to the coronavirus pandemic, including extending their payments for up to seven years after their initial plan payment was due.

I am still here during the Covid-19 Crisis. Lawyers are considered officers of the court. As long as the bankruptcy court is open, and it is, I have to be open too. Still, I am taking every precaution. Don’t be offended if I wipe off the pen you used or anything else you touched, or if I pull my chair back and keep my distance. Also, I am learning how to use Zoom. Already have been using Hangouts and Skype. I prefer Hangouts for virtual face to face; but one can still get a lot done by just meeting remotely by old fashioned telephone. I am limiting actual visits to my office as much as possible.

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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.    

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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.”

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Just Updated my Blog Theme

Debt Relief, MN Bankruptcy

By David J. Kelly, Minnesota Bankruptcy Lawyer

I have grown weary of getting messages from Google that my site is not mobile friendly. I will admit that up until now I have had to squint a bit to read my blog posts. I was fearful that changing the theme of the blog would be a long and painful process, time consuming and confusing. I have found so far that it is just the opposite. The whole thing took less than an hour.

There are bound to be bugs, however, and if you notice anything that looks strange please let me know.

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