My last blog post suggested five things to do when considering bankruptcy; I wanted to start out being positive, and the things not to do are probably more important.
The first three tips concern keeping your family out of your finances. While it is perfectly normal for people to turn to family when things are getting rough financially, you may unwittingly draw them into the web of the financial consequences of a bankruptcy.
- Don’t pay debts back to relatives. This is considered a preference, which a bankruptcy trustee can avoid. They don’t care if you pay your family back after you file bankruptcy, but there are look back periods going back up to six years where the transaction can be avoided, i.e. the trustee could try to recover the money from the relatives to pay it to your other creditors, because it’s unfair to prefer relatives.
- Don’t borrow from relatives. I say this for a couple of reasons; first, it helps preclude the situation in the previous paragraph from ever occurring. And the other thing I have seen too many times, it is where people get into financial trouble and turn to their parents for help, and end up paying off their debts, then either going back into debt, or didn’t pay off all of their debts, and end up needing to file bankruptcy anyway, in which case they want to honor their debt to their parents. I don’t think parents should be supporting their adult children, aside from nominal support while in college, living with parents, and of course, in cases where there is a disability. The one exception I would make to this, is that it is okay to borrow from relatives to pay bankruptcy attorney fees.
- Don’t transfer or give things away to relatives. While chapter 7 bankruptcy is considered liquidation, and in rare cases people may have nonexempt assets which they will be advised to get out of their name, putting all of your assets in your brother’s name so that you can avoid creditors has been proscribed since the Fraudulent Conveyance Act of 1571. Selling things to family members for less than fair market value can similarly be undone by a bankruptcy trustee. And even if you avoid bankruptcy, fraudulent conveyances can be undone by creditors under similar state laws, although it happens infrequently.
- Don’t consolidate your unsecured debt by taking out a 401(k) loan or a home equity loan/refinance. If a bankruptcy is going to be inevitable, you should protect the assets that are exempt, and the homestead and 401(k) are always protected. 401(k) loans can be very expensive in your monthly budget. I have seen too many cases where people did this, and then still ended up with a lot of debt and needed to file bankruptcy anyway, but of course can’t make the mortgages or 401(k) loans go away. If you want to consolidate your debt as an alternative to bankruptcy, there’s nothing wrong with moving it to a different credit card or unsecured loan at a lower interest. Then close the old accounts so you’re not tempted to run them back up.
- Don’t engage the services of anybody outside the State of Minnesota, particularly for profit debt settlement companies. While I suppose that may work in certain circumstances, I often see people who have tried this, thinking that it is a preferable or more honorable alternative to bankruptcy. The services that these outfits offer are sometimes exorbitantly expensive, and can be done just as easily by yourself. If you prefer to delegate the task of debt settlement, it can often be done more affordably, and with more local oversight and regulation, by a local attorney.
- Don’t read (or rely on) articles on the Internet that are written by someone outside the State of Minnesota. Not only are they engaging in the unauthorized practice of law if they are telling you what to do within Minnesota if they are not licensed in Minnesota, but more importantly you could be getting wrong or inapplicable advice. Minnesota is one of the few states, for instance, that permits a debtor to protect assets under either state laws, for which there is an ample homestead exemption, or federal laws, for which there is an ample wildcard exemption. In researching this topic for this blog post, I came across articles that make idiotic, unnecessary suggestions, such as selling all your assets, selling your car and taking the bus, and getting your credit counseling certificate before you consult with an attorney (in which case it very well may expire, and you’ll have to do it over).