The most common type of bankruptcy is Chapter 7. It also tends to be the most desirable form of bankruptcy. Often it is referred to as “straight bankruptcy.” It is the type of bankruptcy where usually you can get rid of all your unsecured debt in just a few months with minimal cost. There is typically no payment plan, just relief from your debt.
The best way to qualify for a Chapter 7 is to have annual income below the median for your household size in your state. If your income is a bit higher than that, you might still be able to qualify by passing a means test; but the means test is not all that easy. I would prefer to have your income below the median if we are going to do a Chapter 7. If it is much above the median, I would probably suggest a Chapter 13.
Meidan Income – A Moving Target
The US Trustee’s office has just announced the biggest increase in Minnesota median incomes for bankruptcy purposes that I can remember seeing. I calculate that the increases are around 8% for all the household sizes between one and four. Since these increases are supposedly based on a six month period, they seem to be thinking that median incomes in Minnesota have been increasing by 16% on an annual basis. I find that hard to believe, but I won’t complain.
Most years the median income numbers are adjusted on April 1st and again on November 1st. Sometimes they all go up, sometimes they all go down, sometimes the ups and downs are mixed, and sometimes they don’t change at all. Every state is different and is assigned their own set of numbers.
Latest Numbers for Minnesota
Here’s the exact Minnesota numbers as of the recent update copied from my Chapter 7 page:
One person: $ 71,643
Two people: $ 90,946
Three people: $ 114,267
Four people: $ 141,324
Add $9,900 for each individual in excess of4
For a household of one the increase is $5,309 per year. For a household of two it’s a $6,739 per year increase. It’s $8,467 for a household of three, and $$10, 472 for a household of four. If you thought you didn’t qualify for a Chapter 7 before, take another look. These numbers could make a big difference.
Call or text me at 952-544-6356. We can set up a time for a free telephone consultation to talk over the details of your case.
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.
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.
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.
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.
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.
Yesterday I received an email from the Minnesota Bankruptcy Court stating in part as follows:
If there is a lapse in appropriations after January 25, the U.S. Bankruptcy Court for the District of Minnesota will likely be operating with reduced staff focused on processing filings that directly affect the protection of human life and property, as required by the Anti-Deficiency Act. The court is still in the process of determining which activities can and cannot be performed during a shutdown, and will provide ongoing guidance as these determinations are made.
We anticipate that, during any shutdown:
CM/ECF will remain operational;
The BNC will continue to process and send notices in the ordinary course; and
PACER will remain operational and the PACER Service Center will provide ongoing support services.
In the coming days, we plan to set up an email box to which you can direct questions, concerns or comments about the shutdown. We will send out the email address with any additional updates as these become available.
I take this as meaning that for now I can continue with business as usual but that I better keep a close eye on things.
Around this past Thanksgiving CNBC published a report about how an alarming number of shoppers are still paying off debt from Christmas of 2016. A lot of the data in the report came from a source called NerdWallet. It seems that holiday-induced spending and debt is a growing problem. 24% admitted to overspending for the holidays of 2016. Among baby boomers, 64% went in debt to pay for Christmas. For Gen-X it was 58% and for millennials it was 40%.
When it comes to not yet having paid off the 2016 debt, the millennials led with 24%. Gen-X came in at 16% and the boomers were at 8%.
The advice offered by CNBC to help avoid going into debt over the holidays again is threefold:
Make a good budget and stick to it.
Keep an eye out for sales; and
Pay debt back.
My reaction to this advice is to say to myself “well that’s easy for them to say.” Credit card debt has a way of sneaking up on a person. Not everyone is capable of paying their debt back. Many are overwhelmed and the bills that come in after Christmas can be the straw that breaks the camel’s back.
If you are looking at your holiday bills and other debts in shock, perhaps it is time to consider another alternative. Once unsecured debt totals more than half of your annual income, it is usually impossible to get it paid back. For you a Chapter 7 or Chapter 13 bankruptcy might be a good idea.
If you’ve been reading my stuff, you know I’ve said this before. My clients are good people. Prior to giving up and deciding to come see me, they have tried just about everything and anything to avoid bankruptcy. Among the various desperate measures many have tried is the payday loan. What is a payday loan? It’s one of the worst, most despicable, predatory schemes ever devised by the greedy and clever.
How does a payday loan work? Well, it’s aimed of course at people who are employed and who as a result have a regularly scheduled payday. It can be done at a storefront or on a web site. These days most of the payday loans I see have been done on line. One starts by providing bank account information along with employment information. This includes the amount of a typical paycheck and when it is ordinarily received. One site I just looked at claims to be able to approve the loan within two minutes. Typically the amount will be about $500, but sometimes it can be more. The money will be deposited into the borrower’s checking account within a day or less.
The borrower doesn’t have to repay the loan until after his or her next paycheck is deposited into the checking account. What can be the harm? At about the time the pay check from the borrower’s job is deposited into his or her account, the whole loan is automatically repaid by an automatic withdrawal, with interest – lots of interest. One site I just reviewed states that the annual interest rate will run somewhere between 261% and 1304%. At first it doesn’t seem that bad. For example, at an annual rate of 300% the interest on a $500 loan over two weeks is “only” about $58.
The trouble is that once a person starts doing this, it can become very addictive. As soon as it’s been done it once, when payday comes there’s a big hole missing from the paycheck as soon as the automatic payment of the loan is made. So what’s the obvious temptation? Do another one, of course, to make up for the missing money. Pretty soon it’s not hard to start taking multiple payday loans from the multiple web sites that are available for this purpose. Then the extremely high interest, rate which didn’t look so bad at first, can really becoming quite a burden. It can become a treadmill of dependency on these loans. It can interfere with one’s ability to eat, pay rent or buy gasoline. Much like the psychology involved in the slot machines at a casino, somebody has figured out just exactly what is required to keep people coming back and paying in. Usually if I see one payday loan it means my client has been at it for a long time. It may only be one loan, one loan at a time that is. Sometimes it’s two or three or four at a time, enough to entirely consume each paycheck.
Even after my client has hired me to do a bankruptcy, and after I have advised the client that this is the point at which they should stop paying many of their debts, there is a tendency to assume that this advice somehow does not apply to the payday loan. It can be a surprise when I say, “it’s your account and it’s your bank and you can stop that automatic withdrawal any time you want” I have had a few clients leave my office in a rush to try to make it to the bank in time to stop the next withdrawal.
The StarTribune recently published a feature article about payday loans and one of the big businesses in Minnesota that makes them. According to the article the average interest rate customers in Minnesota pay for a payday loan is 277%. Sounds like theft to me, but Minnesota is among 36 states which allow it. If you find yourself going nowhere and losing ground on this payday loan treadmill, it’s probably time to call me for a free over the phone screening as to whether you qualify for a Chapter 7 or Chapter 13 bankruptcy.
This post is for general information purposes only, is not legal advice, and does not create an attorney-client relationship. Nothing on this site is intended to be a substitute for retaining a competent attorney. I am a debt relief agency. I help people file for relief under the federal bankruptcy code.
Well, it took about three weeks to complete, but I think I now have all the pages on my web site converted to the new design. I have tried to make the pages look brighter and more optimistic in color scheme and tone, and easier to read. In particular, I’ve tried to make the pages more friendly to mobile devices. A little over two years since I hired a gentleman to redesign my entire site. I must have liked the design he chose, because I said yes to it. But it certainly did not grow on me over time. The longer I looked at it the less I liked it. I started to feel that it was too dark and foreboding, almost Gothic, with it’s almost black background image and dark brown graphics. It seems to me that people with financial problems are probably already depressed enough without looking at something that gloomy. The other thing was that I was having trouble making changes and updating content.
There were many things about my own site that I could not figure out when it came to editing. I went back to the website creation software I had been using before I hired the expert – Microsoft Expression Web. I checked for updates and found that there were none. In fact Microsoft has discontinued the program and is now giving it away for free. I found a template that looked as if it could accommodate what I had in mind, and then went to work rebuilding the entire site one page at a time. It can be very tedious, but I started to enjoy it after while.
As I went along I updated all the content that needed updating, and added a bit more content here and there. I found errors in the HTML code that needed to be corrected, and did that. Then I tested the pages in Internet Explorer, Firefox and Chrome. For reasons I can’t understand things would look straight in one browser, and be not lined up right in another. I also tested the pages on my Samsung Galaxy and my Kindle Fire. Finally I started to launch the pages and the new images one item at a time.
Looks to me as if I have it all now. But if you see something that looks goofy, I wish you would let me know.
I’ve always been reluctant to accept a bankruptcy case where the Debtors have a reverse mortgage. When I review the paperwork involved with the reverse mortgage, it looks to me as if the homeowners are transferring a bit of the ownership of their home to the mortgage company every month. I have always wondered if that would be considered a fraudulent transfer by a bankruptcy trustee.
Now today I’ve learned, perhaps a bit late, that a New Jersey court is saying that the payments from a reverse mortgage can be garnished by creditors. That’s an idea I never thought of, but I am concerned that it might catch on. In a bankruptcy context this could mean that if a person with a reverse mortgage was to file a Chapter 7 bankruptcy, the bankruptcy trustee would be able to seize all the remaining payments on the reverse mortgage. The trustee could keep the file open and collect the money from the reverse mortage until all the unsecured debts and all the administrative expenses were paid. This is a frightening prospect.
When I see those TV commercials for reverse mortgages I cringe. Seems to me that the advertising is misleading. The folks I’ve met who have reverse mortgages don’t seem to have much of an understanding of what they got themselves into.
One of the most common questions we hear from our customers who are considering filing for bankruptcy is;
If I file for bankruptcy can I keep my house?
Unfortunately, it isn’t a simple yes or no. The short answer is sometimes.
Here we will look at the factors that determine whether or not your house can and should be saved.
Chapter 7 Bankruptcy:
When filing Chapter 7, the debtor may or may not be able to keep their house. This liquidates all of your assets to pay your creditors. Your home is included by federal law.
The catch is that most states have their own form of “homestead law” that protects a portion of the equity of a debtor’s home from the bankruptcy process.
If a debtor has less equity than is protected by his state law, they should be able to keep their home as long as they keep making payments. Your home’s equity exemption is determined by the homestead laws of which state you reside.
Chapter 13 Bankruptcy:
When filing Chapter 13, the debtor can generally keep their house as long as they continue to make the mortgage payment. If your equity in your home exceeds the amount protected by your local homestead laws, then Chapter 13 may be for you.
You might be able to stretch every dollar to make that mortgage payment, but should you? For instance, if you owe creditor’s more than your home is currently worth, your bankruptcy filing might be a good time to cut your losses and walk away.
Do I Want To Keep My House When I File for Bankruptcy?
There are other considerations which also determine your practical ability to keep your home. Are you caught up on payments? How much non-exempt equity do you actually have? When making the decision whether to try and keep your home or let it go you will want to speak to an attorney in your area who is knowledgeable about local bankruptcy laws.
At the end of the day, it is all a question of whether your house represents an asset or a financial hardship.