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Top Seven Things to Avoid Before Filing a Bankruptcy in Minnesota

 

     

 

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 listen to 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.  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!

 

The following is a list of things that in my opinion you should probably avoid if you are thinking about filing a bankruptcy, whether it be a Chapter 7 or a Chapter 13. The list is not exhaustive.  There are plenty of things not listed here that are still to be avoided. This page is just intended to list what I see as the top seven and perhaps briefly describe each one. For more detail check out the links I provide to my blog and Youtube channel, where I have posted a separate article and a video for each item on my list.  If you find that one of the items already appllies to you, it doesn't necessarily mean you shouldn't file a bankruptcy.  It does mean that you need to find and consult with a good bankruptcy lawyer. Often there may be countermeasures that can be employed to minimize or resolve the problem. 

 

1.  Repaying a Debt to a Close Friend or Relative either Directly or Indirectly

 

Close friends, relatives and business partners or associates are considered in bankruptcy law to be "insiders."  If you have a debt owing to an insider, don't repay that.  The amount of any repayment made on a debt owing to an insider within a year prior to filing the bankruptcy case can be clawed back by the trustee in a Chapter 7. In a Chapter 13 that won't happen but you will probably have to make larger payments to make up for it. 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.  You also have 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 an indirect benefit can happen.  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 gives you the money to buy a 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.

 

For more on this topic, take a look at this blog post.

 

2.  Transferring Assets to a Friend or Relative

 

Outright transfers of assets and large gifts are things to be avoided, expecially if it is to a relative or friend.  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 may look at transfers like this as an effort to hide assets.  It can be considered bankruptcy fraud and be very detrimental to any kind of bankruptcy case.  The look back on this under the bankruptcy code is two years, but under Minnesota state fraudulent transfer law it can go back as far as six years.  Talk with your lawyer about whether the transfer you made is going to be a problem, because there are several exceptions such as small ordinary gifts and transfers made in the ordinary course of business or financial affairs.

 

For more on this topic, take a look at this blog post.

 

       

 

3.  Making Large Payments on Your Unsecured Debts

 

The bankruptcy code follows the general principal that all of your unsecured creditors are supposed to be treated equally, at least to some extent  If you have paid a total of over $600 to any one creditor in the 90 days prior to filing the case, this is considered what they call a "preference."  This is something you want to not have done. 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 lawyer.

 

For more on this topic, take a look at this blog post.

 

4.  Drawing Down Your 401K

 

In general, money in a 401K is safe from your creditors and safe from the bankruptcy trustee.  Some exceptions have developed recently for accounts that are being transferred as part of a divorce and for accounts that have been inherited  - these are rare problems.  Usually a 401K or an IRA is the safest place your money can be.  It drives me nuts when right before coming to see me, somebody cleans out their retirement account in an attempt to pay down their debts.  It seems that it is never enough.  Typically most of us underestimate how much debt we really have.  This is another example of why you should talk with a lawyer before making any serious financial changes.

 

For more on this topic, take a look at this blog post.

 

       

 

5.  Getting Married

If you are contemplating bankruptcy and marriage, in most of the situations it would usually be best to do the bankruptcy first. It's a good idea to get things cleaned up before you start your new life. If you wait until after you are married, almost all your spouse's income will in most cases be added to yours for purposes of determining eligibility for bankruptcy. This will happen even if your spouse does not file bankruptcy jointly with you.  If you file your bankrkuptcy while you are still single, you should be able to avoid this problem.  If you have an adult roommate with whom you share expenses, typically only the roommate's contribution to your living expenses would be added to your income for bankruptcy eligibility purposes.

 

Every case is different and there are cetainly exceptions to what I am saying here.  If both you and your partner are in need of a bankruptcy, there is a possibility that you would be better off getting married and then doing one joint bankruptcy instead of two individual bankruptcy cases while you are single. This can be very tricky.  If you and your partner both need to file bankruptcy, before getting married have your lawyer run the numbers both ways and follow the advice you receive.

 

One more word.  Getting married or getting divorced solely for the purpose of getting a better deal from the bankruptcy court could be considered bankruptcy fraud. Don't even think about it. The bankruptcy statute contains a good faith requirement.  Don't be getting married or divorced unless that is something that you were going to do anyway for non-bankruptcy purposes.

 

For more on this topic, take a look at this blog post.  

 

6.  Paying Ahead on Your Mortgage or Car Loan

 

Paying extra on your mortgage or car loan might ordinarily be a prudent thing to do.. But if you are thinking about a Chapter 7 bankruptcy, or even a Chapter 13, this is probably a bad idea. It increases the risk that something might go wrong with your case.

 

For one thing you might run into a nasty provision in the bankruptcy code called 522(o).  This section applies only to homesteads.  It says that if you have taken a non-exempt asset and put it into you house one way or another, such as by paying down the mortgage, this will reduce your homestead exemption IF you did it with intent to hinder or defraud a creditor. 

 

Another problem you might run into is that paying down your mortgage or your car loan, so that now you have more exempt equity in either the car or the house, could be considered to be a fraudulent transfer.  Such trasfers can sometimes be clawed back by Chapter 7 trustees.  In a Chapter 13 you might have to make a larger montly payment because of a fraudulent transfer. 

 

If your house or car are worth less than you owe on them, then your car loan or your mortgage could be considered partailly unsecured.  In that circumstance certain payments on a car or a house could be considered a preference. See what I say about preferences above in the section about making large payments on unsecured debt. 

 

For more on this topic, take a look at this blog post.     

 

 

 

7.  Recent Debt Run-up

 

The bankruptcy code has provisions which allow a creditor to object if the debt in question was incurred as a result of fraud, misrepresentation or false pretenses.  While there are lots of different ways you could get accused of false pretenses or fraud, the most common way it happens is when you have a debt that was run up right before filing the bankruptcy case.  The creditor will look at the history of the account, especially in the 90 days to six months prior to the filing of the bankruptcy. If there was a spike your use of credit during that time, they will say that proves you ran up the debt at a time you intended to not pay it. Incurring debt you do not intend to pay is considered to be fraud, misrepresentation and a violation of an implied promise to pay. If you were using credit for luxury goods and services, things you never had or did before, that makes it look worse. The bankruptcy code has provisions giving creditors a presumption in their favor if $725 or more is run up on any one account within 90 days before the case is filed, OR if there is a cash advance of $1,000 or more within 70 days before the case is filed.

 

When you first go to consult with a bankruptcy lawyer you can expect a series of questions about what kind of debt you have and how old it is.  If it has been run up recently, your lawyer will want to take a close look at it.  If you have been making payments, that tends to be proof that you did intend to pay.  Recent debt run-up isn't usually a reason to not file bankruptcy, but it could be a reason to delay filing.

 

 For more on this topic, take a look at this blog post.

 

 


 

 

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Minnesota bankruptcy lawr office across from RidgedaleKelly Law Office
11900 Wayzata Blvd. #116E
Minnetonka, Minnesota 55305
Phone: (952) 544-6356

Fax: (952) 525-7924

Email: dave@mn-bankruptcy.com

 

Across I-394 from Ridgedale.  Serving Minneapolis St. Paul area with easy access from western suburbs including Minnetonka, St. Louis Park, Golden Valley, Hopkins, Plymouth.  Also available by appointment only at 8421 Wayzata Blvd., second floor, St. Louis Park, MN 55426.

 

 

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