The MLG Blog


Why you should stop paying your credit cards before you file bankruptcy in Minnesota

January 27, 2010

Many clients are astonished when I tell them to stop paying their credit card bills before we file their case. This advice isn’t given as a way to hurt the credit card companies, rather it is based on the Federal Bankruptcy code. Section 547 of the Bankruptcy Code defines “preference payments.” When a person pays an unsecured creditor within 90 days of filing their bankruptcy they are prefering that creditor over the others who have received nothing, which is unfair to those creditors.

The whole purpose of the bankruptcy is to treat all creditors fairly in the distribution of any non-exempt assets. For most chapter 7 clients the creditors receive nothing. It then follows that if you paid a credit card company in the 90 days previous to filing that creditor is being favored.

If someone does pay an unsecured creditor within 90 days of filing the trustee has the power to “avoid” that transfer. Avoiding a transfer is a fancy way of saying cancelling, or voiding the transfer. The trustee has the power to recover that money from the creditor and split it up among the other creditors. If this happens virtually everyone loses. The client will never see that money, the creditor has the money taken away from them and split up among the other creditors.

Credit card companies understand these rules are are not suprised when they talk with a client and are told that the client won’t be paying anymore as they are planning on filing bankruptcy.

Preference payments are just one of the issues that we cover in our free consultations and bankruptcy planning. If you have been under financial stress and want to learn more about the bankruptcy process please give me a call. We help people in Minnesota deal with their debts every day.

Contact Jim Anderson at the MLG Bankruptcy Group, PLLC at 952-841-0000 or at .(JavaScript must be enabled to view this email address)

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Can I (or should I) keep my home through bankruptcy?

January 21, 2010

Generally speaking if a client of mine is having a hard time making their mortgage payments, and they do not foresee any increase in their income I usually advise them to seriously consider giving up the home.

But first a primer on the different foreclosure processes available to mortgage companies:
1. Foreclosure by advertisement: The foreclosure is advertised in the paper and you are not sued in court. After the foreclosure you don’t owe the first mortgage company for any shortfall in the sale of your home. However, if there is a second mortgage they can sue you for what they are still owed. The vast majority of mortgage foreclosures on homes are by advertisement.
2. Foreclosure by action: The mortgage company sues you for breaching your mortgage contract and they will seek a judgment against you for any shortfall in the sale of your home. They will then attempt to garnish wages and levy bank accounts until the judgment is either satisfied or discharged in bankruptcy

The reasons for this advice can be explained by imagining the most likely outcomes of keeping your home through a chapter 7 bankruptcy:
• You continue to struggle making the mortgage payments but stay current and run in to no problems. If your income stays as it is or increases, and your living expenses do not increase this could work, but it is almost impossible to predict if this will be the case.
Best case scenario is your income increases and you can afford the monthly payments or you continue to scrape buy making the possibility of falling in to debt again that much more likely.

• You make payments for a while but then fall behind. Eventually the mortgage company will foreclose and you will loose your house. If you have a second mortgage the consequences of a foreclosure get even worse (see above).
Because the home was kept through the bankruptcy you will be unable to file chapter 7 again for 8 years. You can always file a chapter 13 bankruptcy, but to be able to do that your monthly income must exceed your monthly living expenses. That disposable income will be put in to a payment plan for either 3 or 5 years.
If there is only one mortgage on the home generally there is no judgment for any shortfall in a sale and no income tax consequences
If there is a second mortgage, they will likely sue you for the shortfall and get a judgment against you. They will then begin garnishing wages and levying bank accounts.

Those two scenarios are not ideal. If a client is filing bankruptcy, it is the best time to walk away from the home. The foreclosure process will either begin or continue and most people can live in their homes for 8 months to 1 year mortgage free while they save up money for an apartment or rental home.
In summary, the risks usually far outweigh the benefits of keeping a home through bankruptcy if you are struggling to make the payments.

Each case is unique, and this general overview of keeping homes through a bankruptcy does not cover all of the possibilities. If you would like to speak with an experienced bankrutcy attorney based in Minneapolis MN, please do not hesitate to contact me.

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Forgiveness of debt and home foreclosures

January 06, 2010

Many clients are concerned about the income tax consequences of haveing debt forgiven. They have heard through friends or relatives that if debt is forgiven they will receive a 1099 from the loan company, and that the forgiven debt will be deemed taxable income by the IRS. While this may be technically true there are exceptions that most people can utilize to avoid having to pay income tax on debt that has been forgiven.

Lets take a look at how the rules are applied to foreclosures and home loans, using an example of a home with 2 mortgages.

If it was a straight up foreclosure by the 1st mortgage company and the 2nd mortgage company didn’t get it’s loan paid off through the foreclosure the debt wasn’t forgiven on the 2nd mortgage.

In most foreclosures with 2 mortgages the second mortgage is totally unsecured and receives nothing through the foreclosure. An example might make this more clear.

Let’s say the house is worth $100,000. The first mortgage is fore $120,000 and the second mortgage is for $15,000. In this situation the first mortgages forecloses, at the sheriff’s sale the first mortgage will bid the amount they are owed or the actual value of the property, whichever is less. In this case they would bid $100,000. If no one outbids them the first mortgage company owns the house.

Since the first mortgage company technically bought the house for $100,000, but they were owed $120,000 the homeowner has had $20,000 of that first mortgage forgiven. The IRS considers any forgiveness of debt as the same as income and must be reported and taxed as income. However, the Mortgage Debt relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt or forgiveness of debt in connection with a foreclosure.

So in the example above the former homeowner would not be taxed on the $20,000 worth of debt forgiven through the foreclosure. However, the second mortgage is altogether different. The second mortgage company did not receive anything in the foreclosure and has not forgiven or discharged the debt. Usually the 2nd mortgage company will sue the former homeowner for the amount of the second mortgage under a breach of contract. If the former homeowner fails to defend or answer the lawsuit the second mortgage company will receive a default judgment and will begin collecting on that judgment.

Second Mortgages are often times what forces people in to bankruptcy, namely to get rid of the debt from a second mortgage.

More information can be found at the irs website on this topic at http://www.irs.gov/individuals/article/0,,id=179414,00.html

If you have questions about bankruptcy in Minnesota or debt and foreclosures please feel free to contact me at .(JavaScript must be enabled to view this email address).

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What happens to my 401k if I file Bankruptcy in Minnesota?

January 06, 2010

Qualified ERISA retirement plans such as a 401k are often a point of concern for debtors. Many people believe that if they file bankruptcy in Minnesota they will loose their retirement savings. This just is not true. The bankruptcy code (specifically 11 USC 522(n) states that individual retirement accounts are excluded from bankrupcy for all amounts up to about $1,000,000.00. This essentially means that if you have 401k’s etc. that total less than $1,000,000.00 you will be allowed to keep those accounts through your bankruptcy without loosing any of the money to the bankruptcy estate.

Like all things there are exceptions, such as single employee plans or self employment plans require a more detailed analysis. Your bankruptcy attorney will be able to assist you in determining if your retirement plans are covered under this code section.

MLG Bankruptcy group has been protecting retirement plans through bankruptcy for years. If you have questions about your particular situation please feel free to contact us. I can be reached at .(JavaScript must be enabled to view this email address) or at 952-841-0000.

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How long does a chapter 7 take

October 14, 2009

How long will my case take from start to finish?

That is a very common question from clients, understandably they want to know when they get their “fresh start.”

While the timeline can vary greatly for different clients, generally if there is no real estate involved, or the client is giving up the home, the following timeline lays out the average experience of chapter 7 clients. All dates are calculated with the day of filing your case as day 1. Please refer to the earlier entry on “common terms used in a bankruptcy” for definitions used in this entry.

Pre-filing: The planning and preparation for filing can take the most time for a chapter 7 client. Delaying or accelerating the filing of your case can change the outcome of a chapter 7 greatly. An analysis of an individual’s situation is required to determine how much pre-bankruptcy planning needs to be done.

Day 1: Filing of your case. Your bankruptcy will be filed with the Bankruptcy Court. The automatic stay takes effect, preventing creditors from contacting you or repossessing property for the time being.

Day 4 or 5: Notice of first meeting of creditors is sent out by the court. This notice states when and where your meeting will take place.

Day 31: The first meeting of creditors takes place. The person(s) filing bankruptcy meet with their attorney and the trustee. The trustee will put the person(s) filing under oath and ask them general questions about their petition.

Day 60 to 90: Discharge order is signed. If the trustee doesn’t raise any issues with your bankruptcy the court will issue a discharge order. This order wipes away dischargeable debt.

Day 120 to 150: Order closing the case is signed.

As you will notice there is only one date in this generic timeline that requires the people filing to meet with the trustee. If everything goes smoothly the people filing bankruptcy will have long periods of time when they do nothing.

It is important to remember that your case could differ from this generic timeline. You should consult with an experienced bankruptcy attorney for an analysis of your individual situation.

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