Watch out for fraudulent transfers in bankruptcy

A fraudulent transfer is a transfer of property before filing bankruptcy that may get you in trouble. If you've given away or sold any property in the six years before filing a bankruptcy case. you might be on the hook after your bankruptcy.

1. When you're actively trying to screw your creditors. An actual fraudulent transfer is where the bankruptcy debtor transfers property actually intending to evade his creditors. So for example, a bankruptcy filer gives away a car to her nephew three months before filing bankruptcy because she doesn't want her creditors to be able to seize it. That may be a fraudulent transfer. And the bankruptcy trustee can go after the bankruptcy filer and her nephew to get back the car (or the cash value of it.) An actual fraudulent transfer can also result in the bankruptcy discharge being taken away.

2. When you're not trying to screw your creditors, but do it anyway. A constructive fraudulent transfer is where the bankruptcy debtor gives away property and doesn't get fair value for it. So the bankruptcy filer isn't trying to evade creditors, but sells her car to her nephew for $1,000 when it's really worth $10,000. The bankruptcy trustee may have a claim against the filer and her nephew for the remaining $9,000 value of the car. Because this kind of transfer isn't made with bad intent, it won't be a basis for taking away the bankruptcy discharge. The trustee must show that the bankruptcy filer (1) was insolvent; and (2) didn't get fair value back for the transfer.

3. The person who received the transfer may also be on the hook. The bankruptcy debtor isn't the only one who can be chased by the trustee for a fraudulent transfer. The person who received the goods can also be sued. The best defenses the recipient may have are (1) that the property wasn't actually worth anything in the first place; and (2) the transferee accepted the property in good faith and gave back fair value for the property.

4. The trustee can look back six years to find fraudulent transfers. The bankruptcy forms require a filer to disclose any transfer made within the two years before filing. However, the trustee can go after any fraudulent transfer made up to six years back. So people who have a fraudulent transfer in their past often wait until the time limit is passed before filing a bankruptcy.

We deal with fraudulent transfer issues all the time. If you have questions about a fraudulent transfer you made before your bankruptcy, or if you're being sued by a trustee, get in touch.

The bankruptcy process in Minnesota

In this post we describe the bankruptcy process in Chapter 7 and Chapter 13 so you know what to expect when you come see us.

1. You get in touch. Give us a call at 612-564-4025. We can often get you in the same or next day. Your first meeting will be about an hour long. As soon as you decide to hire us, we spring into action, organizing your paperwork and preparing your case. At this point, you can send your debt collectors directly to us—no more endless phone calls.

2. We prepare your case. It generally takes us three weeks to file your bankruptcy petition—a collection of relevant documents and an asset inventory. Once we file your case, collection activity—such as letters, calls, lawsuits and foreclosures—stops immediately. As we prepare your case, we help you choose the best type of bankruptcy for your unique situation—Chapter 7 or Chapter 13.

3. We help you choose what type of bankruptcy is best for you. 

• You might choose Chapter 7 if: 1) Your expenses are way higher than your income, leaving nothing extra to pay your debt; 2) You don’t own a home, or if you do, you’re up to date on your mortgage payments; 3) You don’t own many valuables.

• You might choose Chapter 13 if: 1) You can afford to repay some of your debt, but not all of it; 2) You’re behind on your mortgage or you’re underwater with a second mortgage; 3) You have valuable assets, such as home equity, that you want to hold onto.

4. Will I have to go to court? In bankruptcy, you generally don’t have to go to court. Instead, you meet with a bankruptcy trustee a month after your filing date. The trustee evaluates your financial situation. We make sure you’re well prepared, and we’ll be by your side to make sure it all goes smoothly.

5. Finishing your case in Chapter 7. Chapter 7 usually lasts three to four months. Your bankruptcy is typically completed 60 days after meeting with the bankruptcy trustee. Once your case is finalized, your debts are wiped out forever.

6. Your Chapter 13 payment plan.  In Chapter 13, you’ll make monthly payments for three to five years to pay off your debt. We’ll be your lawyers the whole time, in case you need help or your financial situation changes. Once you make your last Chapter 13 payment, your remaining debts are wiped out.

7. Rebuild credit. People who put in some effort to rebuild their credit after bankruptcy can usually make their score rise a lot faster than people who just wait for their credit to fix itself. We meet with all our clients free of charge after the bankruptcy is over to see how we can help clean up your credit report and give you tips for building new credit.

What does Chapter 13 bankruptcy cost?

In an earlier post, we wrote about how we price our Chapter 7 cases. One of the first things a potential client wants to know during a consultation is how much bankruptcy costs. Obviously, every case is different, but here’s a rough version of how we price cases in Chapter 13.

Flat fee

In Chapter 13, you pay a flat fee out-of-pocket. When you're in financial trouble, you want predictability. You don't want your lawyer to run up the bill on you. That' why we quote you a flat fee at the beginning of the process, and that's what you pay. No fine print, no hidden fees. We agree on it at the start so you can plan for the expense.

Payments over time

You don't need to pay your whole fee upfront in Chapter 13. Unlike Chapter 7, in a Chapter 13 case we don't need the whole bankruptcy fee up front. In fact, in many cases Chapter 13 costs less upfront than Chapter 7--some people even opt for Chapter 13 because of our flexible pricing. We generally require a minimum of $1,000 before filing in a Chapter 13, but this can depend on your case.

We get the rest of our fee out of your creditors' pockets. In Chapter 13, we can apply to the court for our remaining fee. Because this comes out of the Chapter 13 payments you're already paying, in most cases it doesn't cost you an extra dime. In fact, if you're looking for an extra way to stick it to your creditors, here it is. The money we receive from the Chapter 13 payments would have lined their pockets if we hadn't applied for it. Our total fee comes out to $2,500 for below-median income cases, $3,000 in above-median cases, or greater if we can prove to the court that it was necessary to charge more.

Filing fees and costs

In a Chapter 13 case, there is a court filing fee of $310 and mandatory credit counseling fees (for our clients, credit counseling runs around $60 for a single filer or $80 for joint filers). You pay those fees to us and we forward them as needed.

And remember--you may not want to bargain-hunt on bankruptcy. The best lawyers will quote you a fair price, but the worst ones will probably discount their fees to try to take business from the good ones. You want a lawyer who’s experienced enough to understand a lot of the tricks and traps of bankruptcy. You also want someone who’ll be available to answer your questions, and won’t blow you off because they’re too busy with all their other cases. And you want someone who’s willing to use the bankruptcy law creatively to help you improve your situation.

What to expect at the bankruptcy meeting of creditors

This post describes what you can expect at your bankruptcy meeting of creditors in Minnesota.

1. What's a bankruptcy meeting of creditors? A meeting of creditors, sometimes called the "341 meeting," is a requirement of bankruptcy. In most bankruptcy cases, you do not have to appear in court. You go to a meeting of creditors instead. In most cases, the meeting is just a formality, but it's important to prepare either way.

2. When is the meeting? Usually three to five weeks after you file your bankruptcy case.

3. Who shows up at the meeting? The bankruptcy meeting of creditors happens in public, so other bankruptcy filers and attorneys will be there. There is also the bankruptcy trustee, who conducts the meeting. The judge is never at the meeting of creditors.

4. But it's called the meeting of creditors. Won't my creditors be there? Creditors show up VERY rarely to these meetings. In the last 100 cases we've been involved in, a creditor has shown up only once, and we totally expected it and prepared for it. Credit card companies, car lenders and mortgage companies almost never show up.

5. What do I need to bring? This is important. The meeting will be canceled and rescheduled if you don't bring proof of ID and social security number. You'll also need your most recent paystub and all bank statements covering the date of filing. We'll ask you for all this stuff way before your meeting so we have backup copies in case you forget.

6. How long does the meeting take? The trustee usually schedules five cases every half hour. So your meeting should take more than a few minutes, unless we've told you that your case is complicated. But if that's the case we'll make sure you're well prepared.

7. What should I wear? Just dress like you would to a meeting at our office. There's no need to dress up, just dress neat (and don't overdo it on the bling--if you come in looking like a zillionaire, people will wonder why you're filing bankruptcy.)

8. What will the trustee ask me? Here are a few questions the trustee is likely to ask:

• Is this your signature on the petition and schedules? Did you read the petition and schedules before you signed them? Is the information true and complete?

• Have you listed all of your assets on the schedules? Are you a co-owner of any property with anyone else? (e.g. family cabins)

• Do you expect to come into any money, such as an inheritance?

• Does anyone owe you money?

• Have you paid any creditors in the last 90 days, other than minimum payments?

• Are you a party to any lawsuits you haven’t identified in your schedules?

• Are you owed any domestic support? Do you owe domestic support?

• Have you transferred any property to anyone in the last year? Is anyone holding property for you?

• Have you previously filed bankruptcy?

9. How should I answer? Just tell the truth. Don't feel like you need to tell a whole story--keep your answers short and sweet--but answer truthfully and completely. If you don't know the answer to a question, ask for clarification--it's better not to answer right away than to answer incorrectly.

10. Where is the meeting? 

• Minneapolis Chapter 7 cases: Federal Courthouse, 300 South Fourth Street, 10th Floor

• St. Paul Chapter 7 cases: Federal Courthouse, 316 North Robert Street, 4th Floor

• Minneapolis/St. Paul Chapter 13 cases: Federal Courthouse, 300 South Fourth Street, 10th Floor

Do I need to file business bankruptcy?

This post explains business bankruptcy and helps you figure out if it's a good idea for your business.

1. I have business debt. Do I need to file bankruptcy?

I am a sole-proprietorship. If you are a sole proprietor, you are the business. This means that the business assets are your assets, and the business debts are your debts. If you file personal bankruptcy (under Chapters 7, 13 or an individual Chapter 11 case) your business debt will be wiped out and your business creditors can't collect from you.

I am an LLC or corporation. If you own a separate legal entity, then filing personal bankruptcy won't wipe out your business debts. To take care of business debts, you can do a few things:

• - Negotiate with the lender to settle the debt;

• - Close your business and turn over any leftover assets to your creditors; or

• - File a business bankruptcy to reorganize your debt.

2. How do I close my business without filing a business bankruptcy?

You can close a business by filing a "dissolution" with the Minnesota Secretary of State’s office. Dissolution gives notice to your creditors that you are closing up shop, and gives creditors a chance to try to collect assets before the business is wrapped up. You may be able to dissolve a business on your own, but you’ll probably want to consult an attorney first, to see if there will be any issues to watch out for.

3.   Do I need to file business bankruptcy?

Generally not. If your business has lots of real estate, secured debts, or large assets, you may want to look into business bankruptcy to reorganize your debt. But most people don’t need business bankruptcy. If you have a business that’s insolvent, the dissolution process described above should be enough.

4.   Are my business debts wiped out in my personal bankruptcy?

If you close a business and you have personally guaranteed the debts, the business creditors may try to collect from you after the business is closed.

Your personal liability on your business debts is erased. This means that if you default on your business debt, your creditor cannot come after you personally for that debt. On the other hand, this doesn’t prevent the creditor from collecting the business’s assets.

One other important point—if you have business debts, and a business bank account with the same creditor, your creditor probably has the right to take money directly out of your business account if you don’t pay the business debt, even after a personal bankruptcy. If you are keeping your money with a bank that is a creditor, the smart play is to move it as soon as you can.

My Chapter 13 was confirmed. What now?

This post describes what happens after a Chapter 13 bankruptcy is confirmed. Confirmation is the biggest hurdle in Chapter 13, but it's not the end. Congratulations, your Chapter 13 plan has been confirmed! (If our congratulations are early, don't worry--your turn will come too). Since you'll be in Chapter 13 for three to five years, you probably have a bunch of questions about what to expect. We'll tackle a few of these below. If you have other questions, please leave them in the comments below.

1. When do I make my first payment to the trustee? Your first Chapter 13 plan payment is due within 30 days of filing your case. The payment must be by money order to the P.O. Box specified on your welcome letter form the trustee's office. Future payments can be made by automatic debit from your bank account, if we arrange that ahead of time with the trustee's office.

2. Which of my bills should I pay while I'm in Chapter 13? You'll need to pay your new, ongoing bills on time. This always includes utilities, generally includes your mortgage, and sometimes includes your car loan and student loans. Every once in a while, it'll include a credit card if you have a cosigner. But your bankruptcy lawyer should have the final word on what bills to pay. If you're not sure, ask.

3. I'm still getting calls from creditors. What do I do? Your creditors are breaking the law if they contact you after you file Chapter 13. On the first call, you can tell the creditor you filed bankruptcy and give them your case number. If you keep getting calls, you should let your bankruptcy lawyer know right away.

4. I need to buy a new car. Can I take out a loan while I'm in Chapter 13? You'll need permission from the court to take out any new loan while you're in Chapter 13. If you absolutely need financing, call us first so we can take you through the steps of the process.

5. What do I do if I'm going to miss a payment? If you're in danger of missing a Chapter 13 payment, or if you already missed one, call your bankruptcy lawyer. In some cases, we can work with the Chapter 13 trustee's office to help you get caught up on your payments. Otherwise, we might be able to modify your plan. If you don't get in touch before missing a payment, the trustee can move to dismiss your case. The most important thing is that you let us know in advance so we can prevent this from happening.

You're probably starting to pick up on a trend here. If you have a question, call your bankruptcy lawyer. Most of the problems that come up with confirmed Chapter 13 plans can be avoided as long as we know about them in advance. But let us know in the comments below if you have other questions.

How to prepare for your free consultation

1. What to expect. We offer free 30-minute phone consultations (for your convenience), or meetings in our office if you’d rather see a friendly face in-person. And just so you know, your free consultation isn't like a visit to the doctor, where you spend most of your time with a nurse or intern until the doc breezes through at the very end. When you consult, you will always talk to an attorney.

2. How to get ready. We don’t love paperwork (who does?!). Before your consultation, we’ll ask you to fill out a five-minute online form that helps us understand the issues you're facing. If you end up filing bankruptcy, we’ll need a lot more, but we’ve got an easy-to-use online system for getting those docs to us after the consultation.

3. Brush up on bankruptcy. We're happy to explain the ins and outs of bankruptcy to you. We do this stuff all day, and we like to share what we know with you. But if you study up a little bit and understand the basics, we might be able to delve into deeper issues on the first meeting, meaning we can get more accomplished in the free consultation. If you're the type who likes to do your own research, our blog is a good first resource. We also recommend the Bankruptcy Law Network's posts, but remember that they're focused nationally, and because the law is different from state to state, not all the information will apply to you.

4. After the free consultation. Many times we can sort out all your issues in your free consultation and decide on a course of action. Other times we need to do more digging before we can fully understand your options. Throughout this process, feel free to ask any questions that come to mind.

Still have other questions before your first appointment? Let us know.

Is a short sale better than foreclosure?

The short sale industry has been a huge windfall for real estate agents. Some of them scare people into short sales on their home, even though a short sale usually has no advantages over letting your house go into foreclosure. Why do they do this? Simple, it's the fees. Realtors stand to make up to 6 percent from the short sale of your home. On a $200,000 house, that's a tidy $12,000 for the realtors ($6,000 for the seller's agent, $6,000 for the buyer's agent) . Turns out, that's just about enough incentive to pressure you into a short sale, even when there's no benefit to you. 1. Most short sales are no better for your credit score than foreclosure. Both short sales and foreclosures are major credit events that can have a big impact on your score. But there's no support for the myth that a short sale is easier on your credit than a foreclosure. In fact, FICO, the leading credit-scoring company, says the opposite. If you compare a borrower who goes into foreclosure with a borrower who does a short sale where there is a deficiency balance, the credit impact is the same. If the second mortgage company will agree to wipe out your balance, then yes, the credit hit from a short sale may be softer. But this isn't what usually happens.

2. Your realtor probably can't wipe out your second mortgage, despite what he/she tells you. For people who have second mortgages, short sales can be tricky. Remember, in Minnesota, a second mortgage company can sue you after foreclosure for any remaining balance left on their loan. A lot of times, the second lender will release their lien if they can get a few thousand bucks from the closing of the sale, but won't release your liability on the loan. This benefits the buyer, because they can buy the house without the lien, but it doesn't do anything for you, since the second mortgage company can still ask you for the remaining balance. So there's no benefit for you--you're on the hook for practically the same amount of money as if you had gone into foreclosure.

3. Foreclosure may suck, but it has its advantages, too. Short sale has a big disadvantage over foreclosure that your realtor will probably forget to tell you. If you sell your house, you'll probably have to leave within a month or two. If you just let your house go into foreclosure, you may have between six months and a year to live in your house mortgage-free and rent-free, while the foreclosure runs its course. That's a lot of time to save up some money for whatever comes next--such as a security deposit and moving expenses. If you short sell your home, you'll be giving up this right.

4. Don't get caught by the details. I know, I know. Most realtors are honest. But when it comes to short sales, there are a lot of sleazy operators out there who'll tell you anything to get you to sell. We've heard lots of cases of realtors telling the client one thing, and when they get to closing, the deal is totally different than they were led to believe. If you're thinking of a short sale, you probably need an advocate who's working for you, not for the commission. We represent homeowners in trouble with their mortgages. We also review short sale documents to make sure you're getting the deal you think you are. Give us a call to talk about your situation.

The foreclosure process in Minnesota

The foreclosure process is a mystery to a lot of homeowners. So here's a timeline that explains how foreclosure by advertisement works (as opposed to foreclosure by lawsuit, which is rare, and has a completely different timeline). Keep in mind that your timeline may vary, sometimes by a lot.

Month 0: You miss a payment. The whole process kicks into motion when you can't make payments on your mortgage anymore, or decide not to make payments. At first the mortgage lender might start calling you or writing you letters. The lender might also reach out to see if you need assistance or if you're eligible for a loan modification. At some point you'll receive a default, or "intent to foreclose" letter. But remember that from this point, you still have a lot of time before the foreclosure actually happens.

Month 3: Your case is sent to an attorney. It's usually about three months of missed payments before your file is sent to a foreclosing attorney. It could be less, it could be more. The attorney might take a couple of tries to get you to start making payments again, usually by calling you or writing threatening letters.

Month 4: Service and publication. In foreclosure by advertisement, the lender must serve you with foreclosure papers. The papers will tell you the date of the sheriff sale, which must be at least six weeks in the future. Then the lender has to publish a foreclosure notice in the newspaper for six consecutive weeks. If the lender skips any of these steps, or doesn't complete them correctly, the foreclosure may later be attacked in court.

Month 6: The sheriff's sale. The sheriff's sale is a really important date, for two reasons. First, it is the last date you can bring your mortgage current in order to stop the foreclosure. After the sale, it might not be enough just to pay the lender the amount you're behind.

Second, after the sheriff sale is completed, we can no longer use bankruptcy to help you catch up on your mortgage. If your sheriff's sale is scheduled for 10 a.m. on Monday, and we file your bankruptcy at 9:59, the sale is void. If it's filed at 10:01, we've missed our chance.

Under Minnesota law, a homeowner can also delay a sheriff sale one time for five months, in exchange for a shortened redemption period to five weeks (see below). This must be done between the date the sale is first published and 15 days prior to the sale. The process isn't all that easy, so don't wait until the last minute if you want to postpone your sale.

Month 12: The end of the redemption period. The redemption period is a six month period starting from the date of the sheriff's sale. During the redemption period, you can continue living in your home. By this time, it's too late to get the mortgage current by paying past-due payments, but you can "redeem" the property by paying the entire sheriff's sale amount plus interest and fees anytime before the redemption period expires.

Month 13: Eviction. Eviction is the final step in a foreclosure. After the redemption period has ended, if the lender wants get you out of the house, it must file for an eviction in court. This usually takes about a month to complete. People don't usually like to be evicted, so most people move out of the house on their own sometime after the redemption period ends.

No matter where you are in this process, we can help you determine your options, including litigation and bankruptcy. If you want to talk more about how to prevent foreclosure, call us at (612) 564-4025 or email us.

Building credit after bankruptcy

In an earlier post, we told you about the effect bankruptcy can have on your credit score. People who put in some effort to rebuild their credit after bankruptcy can usually make their score rise a lot faster than people who just wait for their credit to fix itself. here we give you some tips for boosting your credit score after bankruptcy.

Check-up on your credit report

After filing bankruptcy, it's important to make sure that your creditors have wiped your debts clean, or at least noted that the debt was discharged in your case. If old pre-bankruptcy debts come back to haunt you, they can drag down your score. That's why for our clients, we offer a free check-up appointment after a bankruptcy case is finished. We'll look over your credit report to make sure everything that was supposed to be wiped out was wiped out. If any accounts are still showing as active or in collection, we may use the Fair Credit Reporting Act to fix your report.

Secured credit cards

After bankruptcy, you might not be eligible to get a new credit card, or the cards you can get might not be the ones you want (watch out for sky-high rates, and predatory contract terms from the credit cards that solicit recent bankruptcy filers). Secured credit cards work like this: you give the credit card company some money for collateral (say, $500) and they give you a credit limit equal to the amount of collateral. But you use it like a credit card--your charges don't draw down the collateral--the money you deposited just stays on file in case you default on the debt. And unlike a debit card, your on-time payments will help boost your score.

You can get a secured card by comparing cards on bankrate.com. But it might be an even better idea to approach a local bank or credit union that you have a strong relationship with--they might offer low-cost products that are meant to help you without all the tricks and traps.

Eventually, get an unsecured credit card

Often, after a year or so of on-time payments, the secured credit card company will return the collateral money and convert the account into a full-fledged credit card. A few months of on-time payments may also qualify you for more credit. Gas and store credit cards will probably be easiest to get, although they don't have quite the same score-boosting effect as major bank credit cards do. But remember what got you into trouble in the first place--pay off your balances in full every month, and watch out for sleazy credit card practices that might get you back in trouble.

Stay away from credit repair scams

There are services out there that claim they can fix your credit for a fee. But these services aren't worth the hassle. First of all, some of them will commit fraud to by trying to remove negative, but true information from your credit report, which may get you into more trouble in the long run. Also, you can probably do anything they'd do for you on your own without spending the money. In particular, stay away from any service that want money upfront for fixing your credit--this is prohibited by the Credit Repair Organizations Act, a federal law that governs credit-fixing agencies.

If you've filed bankruptcy and want help rebuilding your credit, or just considering bankruptcy and want to know what the impact on your credit will be, give us a call.

Can I be sued for my spouse's debt after divorce?

People going through divorce often wonder what's going to happen to their and their ex's debt. If they haven't resolved it before the divorce, people going through divorce will need to deal with their debt after divorce. In many divorce decrees, debt can be allocated--for example, the husband agrees to take responsibility for the Capital One card, while the wife agrees pay the B of A Visa. Life is good. But here's something that people often forget to tell you. If you were jointly liable on the Capital One card before the divorce, the divorce decree doesn't get you off the hook. Even though a judge ruled that you don't have to pay Capital One, the divorce decree doesn't change your legal obligation to CapOne. If your ex stops paying his monthly payments, the credit card company can still sue you. In addition, they can come after the full amount of the debt, not just half the balance, or just the purchases you made.

This doesn't mean you can't enforce your divorce decree and go after your ex for the money, but if your ex had the money to pay the card, wouldn't he have paid it to Capital One?

If you were wondering why divorce is one of the three biggest causes of bankruptcy (the other two are medical emergency and job loss) this might be a clue. If you're dealing with debt after divorce, going through divorce, or you're being sued for an ex-spouse's debt, give us a call.

Car loans in Chapter 13

Clients often want to know what we can do to help them with their car payments in Chapter 13. Often we can make it a whole lot easier for clients to pay their car loans. Here are some of the ways we can help.

1. Pay off the car in Chapter 13. Your car loan must be paid in full during a Chapter 13 Plan, as long as the last car payment falls within the term of the Plan. So if you have 49 months remaining on your loan and your Plan is 60 months long, your Plan must pay off the full balance. If you have 61 months remaining on your car loan, you can opt to continue making your normal car payments directly throughout your case and avoid the Trustee's commission.

2. With older cars, "cram down" the loan to the value of the car. If you bought your car on credit more than 910 days (2.5 years) ago, we look to see if the value of your car is less than the amount of the loan. If your car is underwater, we can reduce the amount of the loan to match the value of the car. This is called cramdown, and it's one of the most powerful remedies you have in bankruptcy..

3. Reduce the interest rate to the Till rate. Regardless of whether you bought your car more than 2.5 years ago, we can generally reduce your interest rate on your car loan to the Till rate (named after a Supreme Court case). The Till rate is generally the prime rate, plus some risk factor. So, the prime rate as of the date of this post is 3.25 percent. Assuming we add a risk factor of one percent, the Till rate is 4.25 percent. Very few borrowers already have interest rates lower than 4.25 percent (and many have them up to the mid-to-high teens), so this is a benefit for almost everyone.

4. Surrender the car. The last option, surrendering the car and wiping out the debt, is attractive if your car is a real beater. If the car isn't worth the remaining loan balance, you can always give it up in Chapter 13 bankruptcy just like you can in a Chapter 7 case.

If you're struggling to make payments on your car loan, give us a call. There may be lots we can do to make your car payment more affordable by filing a Chapter 13 case.

Lien stripping: Removing a second mortgage in Chapter 13

One of the benefits of Chapter 13 bankruptcy over Chapter 7 is flexibility. There are just lots of ways we can help your financial situation in a Chapter 13 that we just don't have the power to do in Chapter 7. One of the big ones is lien stripping--wiping out an underwater second mortgage.

1. What is lien stripping? Lien stripping is a way of removing an underwater second mortgage on a house in Chapter 13. If the house has two mortgages, and the second mortgage is fully unsecured, it may be removed. Here's an example:

- The house is worth $250,000

- The first mortgage balance is $251,000

- The second mortgage balance is $50,000

We can strip the second mortgage because it is completely unsecured.

2. How do I know my second mortgage is fully unsecured? You will most likely need to order an appraisal of your house. But the first step is to look at your property tax appraised value. During the housing boom, tax values used to be lower than the true value of the house. But now that housing prices are depressed, property tax appraisals are routinely higher than the appraised value of the house. If you have questions, we're happy to give you a referral to a licensed real estate appraiser.

3. If I can lien strip, what happens to my second mortgage? Instead of classifying the second mortgage as secured debt, which would need to be paid in full over the life of a Chapter 13 plan, a stripped second mortgage is classified as unsecured debt, meaning that it merely needs to be paid prorated with your other unsecured debt. In most Chapter 13 plans, this money comes out of the same pot that will already be allocated to your other unsecureds, such as credit cards and medical bills, so the second mortgage won't cost you any extra money over the plan. At the end of your plan, if you've made all your payments, the court issues an order that removes the second mortgage lien from your house, and you only have one mortgage to deal with.

4. Does Minnesota law allow lien stripping? Minnesota was the only state that did not allow lien stripping until August 29, 2011. The 8th Circuit Bankruptcy Appellate Panel, an appeals court that oversees Minnesota bankruptcy cases, issued its decision in Fisette v. Keller, allowing lien stripping in Chapter 13 cases filed in Minnesota. Since Fisette, we've stripped plenty of second mortgages. An experienced bankruptcy lawyer can advise you whether your second mortgage can be stripped.

If you want to know more about lien stripping, give us a call.

Can I discharge student loan debt in bankruptcy?

This post describes how to deal with student loan debt in bankruptcy.

One of the only types of debt that can't be discharged in a bankruptcy is a student loan, and even then, there are exceptions. But student loan debt in bankruptcy can be discharged in relatively rare situations of "undue hardship"--where the debtor cannot pay back the student loan and probably won't be able to pay it anytime in the future. Under Minnesota (8th Circuit) caselaw, courts consider: (1) The filer's past, present and future reasonably reliable financial resources; (2) a calculation of the reasonable living expenses of the debtor and his/her dependents; and (3) any other relevant facts surrounding the bankruptcy case.

1. How to discharge student loan debt in bankruptcy. To attempt to discharge student loans in bankruptcy, the debtor can file an adversary proceeding, which is a lawsuit-within-a-bankruptcy, against the student loan company. Starting an adversary proceeding is no biggie--there's no court filing fee, and you just file a summons and complaint and send it to the creditor. After that it's pretty much like any other lawsuit.

2. Undue hardship is based on your ability to earn money to pay off your loans.

• - Determining undue hardship has a lot to do with your past and present earning power. The court will look at your job qualifications and earning history. If you have had a long history of low earnings, that might play in favor of discharge.

• - Your ability to earn money in the future is even more important. The court may consider your future job prospects, especially as compared to the size of your loan. If there's no foreseeable way to make a dent in the loan, this will play in favor of discharge.

• - Age may also be a factor. While a fresh-faced 22-year old has an entire life of indentured servitude ahead of him to pay his loans, a 65-year old may be considering retirement and won't have the same long-term earning potential.

• - Disability also plays into the determination. Debtors with disabilities may have less earning potential in some cases. This is evaluated along a spectrum--a permanent and total disability that renders someone completely unable to work may be an easier discharge case, while a partial disability that reduces earning power will probably not be the basis for dischargeability on its own.

3. If there's no money in your budget, there's no money to pay off student loans. The court will look at your monthly income and reasonably monthly expenses, and determine if there's any room for repayment of student loans. If your monthly budget is in the red, this will play in your favor.

The court may also look at your eligibility for various loan repayment programs, such as Income Based Repayment (both for federal loans only). If you can afford to make a reduced payment, that might be a factor against discharge. But even if you can afford a reduced payment, it's not a discharge dealbreaker where the loan will continue to accumulate interest and grow even though you're making payments.

If you're struggling with student loan payments and you think some of the above criteria may apply to you, give us a call.

What are the Minnesota bankruptcy exemptions?

In this post we list the Minnesota bankruptcy exemptions. Post updated January 2018.

In an earlier post we told you about what items were exempt in a Chapter 7 bankruptcy (meaning you get to keep them).  Items that are not exempt may be taken by the trustee to pay your creditors. Although the great majority of Chapter 7 cases are no-asset, meaning that the debtor loses no property, people are often concerned about whether their property is exempt. In Minnesota, you can choose either the Minnesota bankruptcy exemptions or the federal exemptions, depending on which are more advantageous to you. In this post, we compare the two sets of exemptions for some of the most common property items:

Item

Federal exemption

Minnesota exemption

Your home

$23,675

$390,000

Wildcard (any property)

$11,850–$13,100

None

Household goods and clothes

$12,625

$10,350

Jewelry

$1,600

$2,695 (only wedding rings)

Motor vehicle

$3,775

$4,600

Tools of the trade

$2,375

$11,500

Life insurance policy with loan value

$12,625

$9,200

IRA or Roth

$1,283,025

$1,171,150

Personal injury compensation payments

$23,675 (with exceptions)

Unlimited

Social security benefits

Unlimited

Unlimited

Child support

Unlimited

Unlimited

*Some exemptions can be doubled in a joint case, some cannot.

By the way, the exemptions change every so often, so these may not always stay the same. The Minnesota bankruptcy exemptions are complicated, and don't always apply exactly how they would appear to. Consult a bankruptcy attorney to find out whether a particular item of yours would be exempt in a Chapter 7 case.

How much will my Chapter 13 payments be?

For people behind on their mortgage payments and looking to keep their home, or people who make too much money to file Chapter 7, Chapter 13 can be a good solution. As we described in an earlier post, Chapter 13 involves paying your disposable income to creditors over a three or five-year period. Whatever isn't paid during that period is discharged (wiped out). But to figure out whether this makes sense, the question for many clients is: how much disposable income do I have to pay in my Chapter 13 payments? Here are a few guidelines.

1. Your payment plan is based on your projected disposable income. To figure out your Chapter 13 payment, first we figure out your projected income. Your income over the past six months can a starting point for this calculation, but if you've recently taken a pay cut, or you know you won't be receiving the same amount of overtime, we need to bump your income downward.

2. Next, we subtract all reasonable and necessary expenses. To get from just-plain-income to disposable income, we need to subtract your expenses. Here we look at all the expenses that are necessary to take care of your family's needs, such as food, rent/mortgage, car payment, utilities, etc. We also look at things that you know you will be spending , such as car repairs, home maintenance or dental work. Then we look at things you should be spending on, but haven't because you've been in financial trouble. This can include health insurance and other medical expenses, 401(k), life insurance, etc. If there's something that's not on our list of ordinary expenses, that doesn't mean we can't deduct it, as long as it's reasonable and necessary. Once we count all these expenses, we subtract them from income and we get an idea of your disposable income.

3. Our job is to fight for your way of life. The Trustee evaluates the reasonableness of your expenses, trying to cut them down so that there's extra money for you to pay to your creditors. Our job is to protect the money that is necessary for you to take care of yourself and your family. So we ask for two things: 1) verification of your expenses, so we can prove that you actually need to spend that money; and 2) information on why your expenses are reasonable and necessary. For example, one client had an $800 monthly bill for auto fuel. This seems exorbitant, until we realized that the client drives a gas guzzler and lives 60 miles from where he works. If we can explain to the court why an expense is reasonable, there is a better chance it will be allowed.

4. The plan must pay off certain required debts. Your Chapter 13 payments must be large enough to make certain required payments. For example, if you are trying to get current on a mortgage, your total plan payments must cover the amount of your mortgage arrears. Plan payments also must cover any secured debt (car loans) that end within the plan period. Also, plan payment must cover any priority debt, such as some tax debt or government penalties within the plan period. If the total plan payments are enough to pay all of these required debts over the plan period, your plan can survive.

 5. The plan must be in the "best interests" of your unsecured creditors. If you have unexempt property that you are looking to protect in a Chapter 13, your Chapter 13 payments must be at least the value of your nonexempt property. In other words, in Chapter 13 your unsecured creditors can't receive any less in the plan than they would have received in Chapter 7 if your nonexempt property was liquidated.

These rules can be tricky, and Chapter 13 almost definitely cannot be done without the assistance of an experienced bankruptcy lawyer. Give us a call if you want to run a scenario by us.

Can I keep some debts out of my bankruptcy?

Bankruptcy clients often wonder whether they can leave off certain debts on their bankruptcy filing. The short answer is "no." The long answer? Also "no." This usually comes up where you have a #1 favorite credit card (triple bonus miles!) or a debt you owe to a friend or family member that you don't want to wipe out. But the rules for unsecured nonpriority debts (credit cards, personal loans, etc.) don't allow you to keep any debts out of your bankruptcy case, and leaving them out on purpose can ruin your case. So here are a couple of things you might need to know:

1. If you owe a balance, we have to list it. You can leave a credit card out of your bankruptcy only if there's no debt owed on the card. If you owe even a dollar-fifty, we have to list in your papers. But chances are, whether there's a balance on the credit card or not, the card issuer will close your account--many credit card companies check your credit report regularly and they'll know if you've filed even if they weren't listed in your bankruptcy.

But this doesn't mean you should rush to pay off debts on credit cards so you can keep them. Payments made to a creditor in the 90 days before filing are called preferences, and they can be recovered by the trustee and distributed to other creditors. So any money you might pay to a creditor right before filing might end up costing them when they have to defend a preference lawsuit by the trustee. The lesson? You should probably just hold onto your money.

2. Friends and family you owe money to will have to be listed. When we ask a client to list their creditors, people often forget to list friends and family that they've borrowed money from. Or sometimes, they don't want these people to know that they're filing bankruptcy and they leave them off. This is a bad move. If you intentionally leave off a creditor from your filing, you may be denied discharge for withholding information from the bankruptcy court. Also, that stuff I mentioned about preferences a minute ago? Repayments to friends and family may be preferences (meaning the trustee can sue that creditor) if made a full year before filing.

Instead of letting you jeopardize your case, we'll give you pointers on how to have that tough conversation with your mother-in-law where you tell her you're wiping out your debt to her. (Tip 24: Leave the car running for a quick getaway)

3. You can pay back any debt you want after bankruptcy. Your bankruptcy case will wipe out your legal obligation to pay most debts. This means that once your case is filed, the creditor can't take action against you (not even a "pretty please") to collect the debt. However, if you want to pay a debt after your bankruptcy, nobody's going to stop you. It's none of the Bankruptcy Court's business if it's done after your case has ended.

The moral of the story? No secrets allowed if you want to make it through bankruptcy without any problems. Tell your attorney about any of the pitfalls that might be getting in your way and you should sail through bankruptcy smoothly. If you have any questions, just let us know.

Domestic partnership and bankruptcy: An update

UPDATE: As of August 1, 2013, same-sex couples can now file bankruptcy together in Minnesota. In an earlier post, we explained that in Minnesota, same-sex domestic partners cannot file a joint case in bankruptcy, even if they were married in another state. This is still true.

However, in states where same-sex marriage is legal, the pendulum may start to swing the other way. In the Central District of California, 20 of the 24 bankruptcy judges signed onto an opinion ruling that the Defense of Marriage Act is unconstitutional insofar as it prevents same-sex legally-married couples from filing joint bankruptcy petitions.

This is not likely to have an immediate effect outside the Central District of California (Los Angeles and the surrounding area) but if other courts follow suit, it may eventually mean that same-sex couples who were married in a state that recognizes same-sex marriage may file joint petitions in any state.

While this is good news in terms of equal protection, it may be both a blessing and a curse under bankruptcy law. There are advantages to filing jointly, such as the fact that you only have to pay one filing fee to the court. The downside? Under current bankruptcy law, same-sex partners are treated like roommates, so the filing partner does not have to include their non-filing spouse's income on the means test. If partners were treated the same as married couples, then we would need to count the non-filing partner's income on the means test, then subtract amounts that don't go to support the household. It may seem nuanced, but it's kind of a big deal.

Even though the law hasn't changed here in Minnesota, we still stand by our principles. We offer clients in domestic partnerships the same discounted price that we would offer a married couple filing bankruptcy, even though we have to file two separate cases.

Stop foreclosure with Chapter 13

Often people come to see us after they've done everything they can to stop foreclosure. Many try to get loan modifications from their lenders, but after lots of runaround, most are denied. For some strange reason, the lender just won't allow the borrower to get out of default and get back to making payments. With a foreclosure sale (often called a sheriff's sale) on the horizon, many people are looking for a way to stop foreclosure and force their lender to accept payments. Chapter 13 reorganization can be a fix in this situation. Here are some of the advantages:

1. The automatic stay will stop foreclosure. The automatic stay protects you from creditors and prevents foreclosure from taking place, even if the bankruptcy case is filed just minutes before the sheriff's sale. If the clock is ticking on your foreclosure sale and you're out of options to stop foreclosure, filing bankruptcy may give you the time you need.

2. You can force a lender to accept overdue payments over time. Chapter 13 involves repaying a portion of your debt over time to stop foreclosure. In a Chapter 13 case, you pay your mortgage arrears back over the life of the plan. To figure out if this is feasible, we do some simple math. We take the overdue amount on the loan (arrears), and divide it over the length of your Chapter 13 plan (three to five years). Let's say your mortgage payment is $1000/mo and you are overdue $10,000 on your mortgage. In a five-year Chapter 13 plan, we would divide the $1,000 arrears by 60 ($166.67). If you can pay your regular mortgage payment plus an extra $166.67 per month (for a total of $1166.67/mo), the lender will have to accept your repayment plan.

3. In some cases, we can "strip" your second mortgage. We can "strip" a second mortgage that is fully underwater. Here's how lien stripping works--if you have two mortgages, and the balance of your first mortgage is more than the current value of your house, then your second mortgage is "unsecured" because there's no equity in the home to back it up. When that's the case, the lien can be removed and the value of the second mortgage is paid pro rata with the rest of your unsecured creditors (medical bills, credit cards, etc.) Because you only pay the unsecured debt you can afford in a Chapter 13, and the remaining debt is wiped out after the plan has ended, this can save you truckloads of money.

Lien stripping be a huge benefit to borrowers over-stressed by two mortgages. If you're facing a sheriff sale and feel like you're out of options to stop foreclosure, give us a call.

Proving your expenses in bankruptcy - sending money to family abroad

Family is important to everyone. We work with a lot of people who moved to the United States specifically because it provided them the opportunity to earn a better living, which in turn allowed them to support family in their native country. Unfortunately, this does not make them immune from the same issues that often cause people to consider bankruptcy (divorce, major medical expense, and job loss). When we file bankruptcy for a client, one of the things we need to demonstrate to the Court is that the expenses our client claims are accurate. This can be tricky when one of their major expenses is sending money back to their home country to support family members (or buying phone cards to call them). People often use wire transfer services such as Western Union to send money to places in Latin America, Eastern Europe, and Africa. Our clients often send their families some amount of money each time they get paid. The wire transfer companies provide a paper receipt, but generally don't keep records by customer (at least that they've seemed willing to release to the customer). When it comes to international phone cards, the buyer doesn't often get a receipt at all.

We know it's easy to toss or misplace receipts, particularly when they aren't for goods you are likely to return. That said, good record keeping is really important, especially if you need to file bankruptcy. We suggest picking up an accordion folder or other organizer and making a habit of placing receipts for all regular expenses in it. We also advise keeping all used phone cards rubber-banded together, separated by month of use, if possible. We can't guarantee that all your expenses will be justifiable to the Court, but having documentation will help us make the best case possible.

If you're in the Minneapolis area and have questions about bankruptcy or any other financial challenge you're facing, please call us anytime. We provide free consultations.