So much is written about the process of bankruptcy IE what happens when you file, what is a meeting of creditors, what happens after you file to your credit score, but very little is written about what to do, or in many cases not to do, BEFORE you file bankruptcy. I can’t tell you how many times I uttered the words, “I wish you would have called me before you did that.”
But Why Don't People Call The Experts?
I was thinking of this topic after a weekend with some of my family members and legal topics always come up. For example, do you really need to provide invasive cancer treatment to a child or can you, as a parent, select which treatment regimen is right for your child without fear of legal retribution for those choices? This is not an easy legal topic for most trained lawyers, but who does the family member ask this important question to? A non-lawyer sibling no less. When I have a question about my health, I don’t ask a plumber, I ask a doctor who specializes in the area in which I have a question.
The same weekend, another legal topic comes up, this time about a vehicle accident and who is liable for damages and what to do if they don’t pay. Who does the family member call for advice? Yup, a non-lawyer family member. The reason why this is so funny is, there are no less than 3 lawyers in our immediate family! I also hear a lot of people searching for and relying on legal advice they received on line. UGH! Folks, us lawyers are just a phone call away! I literally can be sitting in the middle of a social event, as a lawyer, and listen to non-lawyers give me legal advice all the time. Please do yourself, and your family a huge favor. When you have a question that involves the law, your health, or any other profession, ask the professionals who specialize in that area. After all, they are the experts in that area! It’s like me calling an electrician and tell her about my infection, it just doesn’t make sense!
OK, enough already. Now, back to the story...
There is so much written about what happens and the options you have when filing bankruptcy. We have covered these topics numerous times. But, not a lot gets written about what happens or what not to do before you File Bankruptcy. These two topics are intertwined though and here is how. Say you are experiencing some overwhelming debt problems right? Let’s say you have 50k in credit card debt and you start to see that the medicine you may have to take to resolve this problem is to file a bankruptcy case. Hundreds of thousands of people across the country face this very same inflection point in their lives every year too. When you start to think that Bankruptcy maybe the answer for you and your family, you start to think about your assets. Well, if I File Bankruptcy, don’t they take all my assets? Don’t they take my home? Surely they will take my boat, my jet ski, and my lake home too?
Sometimes, when people ask themselves these questions, they get even more anxious about what will happen to them and their assets when they file bankruptcy. So, they start looking on line and what do they see? They see that people do, indeed, lose assets after they file bankruptcy! Now, panic starts to set in. So, they go to the bar and speak to George who filed a bankruptcy 30 years ago. George is not an Minneapolis MN Bankruptcy Attorney, he is just a real nice guy you see in the bar from time to time and you remember that on one occasion, after a little too much Jack Daniels, he shared with you he filed bankruptcy.
So you ask George, what happened in the bankruptcy? He says, he didn’t lose any assets but he knows of someone who did. You do? What happened? They took his boat and trailer George says. Oh no, they did? Yup, never saw his boat again. The trustee took his boat and some other things too. Other things too? Yup, they sure did. Now, you go into the - “that’s not going to happen to me mode.” So, after reflecting on what you read online and after speaking with George, you devise a plan from preventing this from happening to you. You can’t lose an asset if you don’t own the asset can you?
And as my dad said growing up- “that was the bullet that shot daddy in the ass.”
So, you transfer the lake home into your sister’s name- you know, for safe keeping. You also transfer the jet ski and boat into your other sister’s name, again, just for safekeeping. Now, you figure all is well and you can safely file bankruptcy without a worry about losing these assets. With confidence, you call your local Minneapolis MN Bankruptcy Lawyer, and schedule an appointment to see her. You meet her and when she asks about your assets, you smile inside, and answer only those assets you actually own- leaving out the lake home, boat, and jet ski, as you don’t own those assets, your sisters do.
And then the lawyer asks you the dreaded question. The question you never read about on line and you are quite sure George never said anything about this question. But the question makes your stomach drop like a rock. You feel sick to your stomach- here you thought you were so shrewd, you thought you had out smarted the system and then BAM, it hits you like a mack daddy truck.
The question that makes you this sick is really a two part question: 1) Did you transfer any assets to anyone in the last two years? If so, what did you sell, what was it worth and what did you actually get for it?; 2) did you transfer any assets to a family member in the last 6 years? If so, what did you transfer? What was it worth? What did you actually get for it?
You suddenly realize that the Bankruptcy system has been around for more than a 100 years and they probably have refined the system to catch issues like this. See, we humans are all the same. If we can think of a way, to cut corners we do it, and Congress knows that. So, what Congress did is they refined Bankruptcy Code Section 548. This leads to our first do not do this before you File Bankruptcy.
What Not To Do Before You File Bankruptcy
1) DO NOT TRANSFER ASSETS BEFORE YOU FILE BANKRUPTCY FOR LESS THAN FAIR MARKET VALUE TO ANYONE
Bankruptcy Code Section 548 discusses fraudulent transfers. It gives the trustee the power to avoid any transfer within the past 2 years before filing the bankruptcy, if what the debtor received from the transfer is less than the fair market value of the asset.
In this case, if you file bankruptcy now, the trustee can avoid the transfer of the lake home, boat, and jet ski to your sisters. The trustee sues your sisters for those assets and gets the assets back in the estate for the benefit of your creditors. Since the chapter 7 trustee’s duty is to liquidate the assets of the estate (see Bankruptcy Code Section 704), the trustee will sell these assets, and whatever money is received will go to your creditors pro rata.
Minnesota law is even more stringent than the bankruptcy code. The Minnesota fraudulent statute allows the bankruptcy trustee to go back six years from the date you filed bankruptcy and avoid transfers to family members where the debtor received less than fair market value (see Minnesota Statute Section 513).
So, the lesson here is clear. Do not transfer any of your assets to anyone for less than fair market value before you file bankruptcy. It would have been better for you to sell the lake home, boat, and jet ski to your sisters or fair market value and for you to use the money to pay the debt than it would have been for you to transfer the assets without fair market value and file bankruptcy. Why? Because you will lose them when you file bankruptcy anyway. Of course, there are ways to keep these assets too.
In a Chapter 13 Bankruptcy, you don’t lose your assets as long as you pay your creditors what they would have received had you filed a Chapter 7 Bankruptcy. In English, if your creditors would have received 20k from you in a chapter 7, than you must pay your creditors back 20k in a Chapter 13 Bankruptcy. (See Bankruptcy Code Section 1325(a)(4) -sometimes referred to as the best interest test).
Next, you are considering filing bankruptcy, but you can’t stand the thought of adding uncle Fred to your bankruptcy. After all, he is family right? Uncle Fred lent you 50k to start the dry cleaning business and it’s not his fault the business didn’t succeed. Heck, it wasn’t your fault either that the economy took a world class dump just as you started your business. But you feel so bad about Uncle Fred, that you want to see him get paid and then you won’t have to list him on your bankruptcy.
Uncle Fred is 67 years old, just retired and living on a small pension and social security. The money he lent you was every last dime Uncle Fred could pull together. You are hell bent on paying him back so Uncle Fred can enjoy his retirement like he should.
But, how in the world do you come up with 50k when you are going to file bankruptcy yourself? You search high and low and the only thing you can think to do is to tap in your IRA (a 401k rolled over into an IRA from your last job. The IRA is worth 90k and so you begin liquidating the IRA to pay Uncle Fred.. Liquidating the IRA before it’s time comes with some brutal tax penalties. After all is said and done, and the taxes and penalties are paid, you get a check for $52,800.00. You take the $2,000.00 and pay your bankruptcy lawyer, you spend $800.00 and buy some groceries and the 50k goes to uncle Fred who is ecstatic that he got his money back and relieved.
6 months later you File Chapter 7 Bankruptcy and have credit card debt and business debts totaling $167,000.00. You have long forgot about paying Uncle Fred the 50k six months ago and you are excited to get your life back. The excitement of getting your life back soon turns to horror.
That leads us to DO NOT number 2.
2) DO NOT PAY FAMILY MEMBERS BEFORE YOU FILE BANKRUPTCY
Bankruptcy Code Section 547(b)(4)(B) states that payments of $600.00 or more made to insiders (family members) within one year prior to filing bankruptcy are considered preferences.
Simply put, when you “prefer” one creditor over another, Congress allows the trustee to avoid the payment of the preference and distribute those funds to creditors pro rata. While there are defenses to preferences, many preferences have no defenses and must revert back to the bankruptcy estate.
In the case above, Uncle Fred’s joy at getting the money back soon turns to sorrow when he receives a lawsuit from the Chapter 7 Trustee to avoid the payment of the preference from his nephew. The entire 50k preference will come back into the bankruptcy estate and get distributed to nephew’s creditors pro rata, including the money owed to Uncle Fred.
This could have been avoided had nephew sought competent bankruptcy legal advice in advance. Had nephew waited until after the bankruptcy case was filed, and then liquidated his IRA, the payment to Uncle Fred would not have been a preference and Uncle Fred could have kept the money. What an expensive mistake to make. For a bankruptcy attorney it’s a frustrating mistake because had nephew sought legal advice BEFORE he made such a large payment, nephew would not have made the mistake. The lesson is always seek competent MN Bankruptcy Lawyer advice before doing anything like the above!
If you're in seek of expert bankruptcy advice please contact one of our MN Bankruptcy Lawyers at Kain & Scott today for a FREE, no-obligation Bankruptcy Consultation at one of our 8 convenient and professional MN Bankruptcy locations.