Bankruptcy Do’s and Don’ts – October 20th, 2016 Interview

Katherine:

Hello everyone. Thank you so much for joining us on This Needs to be Said. We are here with our friend, attorney Pete Moak. He’s been educating us on the world of bankruptcy and we’ve learned extensively about several different topics. He’s also shared with you how to get in touch with him to ask more questions. We couldn’t possibly cover everybody’s situation in our short time together.

He’s back with us again on today, and he has another topic for us. Pete, what do you have for us?

Pete Moak:

This topic is a list of things that a person who is going to be filing bankruptcy should do before they file, and another list of things they should not do before they file. I call this my bankruptcy do’s and don’ts.

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Katherine:

All right. Let’s get started.

Pete Moak:

All right. The reason that I made this list is because sometimes the things that people might choose to do are … Intuitively, they sound like this is a good idea but they need to be cautious and follow our steps because they can create problems. Okay?

The first thing I have on the list of things to do is to continue making payments on vehicles that you intend to keep. Of course, if a person misses their payments on their car, the car can be repossessed. The best thing to do, if you intend to keep that car, is to continue making the payments. All right? That’s a pretty simple thing, but that’s … sometimes people are unsure whether they’re supposed to do that.

Also, if the car has … or any property that the debtor owns, and the debtor, of course, is the person filing bankruptcy, that is not exempt property, meaning that the laws do not exist that protects that particular asset or maybe the amount of the exemption is not enough to fully protect that asset, then they can consider getting a secured loan against that property. A friendly lender, somebody who’s not going to charge you an arm and a leg. I try to steer people away from the places that exist on practically every other corner in certain parts of town, that want you to take out a title loan at two hundred plus interest … two hundred percent interest and stuff.

Stay away from those if you can possibly. A friendly lender can give you a loan secured by whatever property that you’re concerned about that is not protected. Whether it be a car or another piece of real estate or some other asset that you own. You can provide a person with a promissory note secured by a security agreement in that property and therefore protect the property from having the Trustee take it and sell it and use that money to pay they creditors. Okay? You have to be careful to actually make sure that the security interest is perfected. In a car, for example, that means that it has to be recorded and posted with the Department of Motor Vehicles, not more than thirty days after the money has been received. Okay?

Now, another thing that you should do is if you owe money to a bank or a credit card issued by a bank or a credit union, if you’re not going to be making payments to that bank to cover the loan then close that bank account. That would prevent the bank from doing an offset. An offset is where you have a situation where the creditor owes you money, that would be the money that you have on deposit, for example, at the bank, and yet you also owe the bank money, that would be money that you borrowed from the bank.

There is something called offset where the creditor can say, “Okay, you have money on deposit in our bank, therefore we’re going to take that money and apply that to the money that you owe us at the bank.” If you’re going to file bankruptcy, and before you file you’re concerned about them doing this trade off, or offset, then the best thing to do is to close that bank account so that they cannot take the money out of your bank account and use that money to pay the debt that you owe to the bank.

Another bankruptcy do, is that if you expect to get a tax refund in the year that you file, so here we are in the year twenty sixteen, and people are not even required to file their tax return for twenty sixteen until April fifteenth of the next year. If you’re going to file bankruptcy in the year twenty sixteen or at any time before you actually get your tax refund, then you need to consider that you want to make sure that you wait until you actually get the refund and spend that money before you file because tax refunds are not exempt. At least that’s true in Arizona and in most states.

The tax refund that you receive is not an exempt asset. What that means is that the Trustee can say, “You’re right to receive that tax refund is an asset that you have to turn over to the bankruptcy Trustee.” Right now, here we are in the month of October. It’s only a couple more months before people are going to be filing their twenty sixteen tax returns and they can usually get their tax refund in about two weeks after they file their tax return. It’s probably a good idea for them to consider waiting until after they’ve prepared their tax return to find out if they are getting a refund, and if they are going to get a refund that’s more than about six to eight hundred dollars, then wait and get that refund and then file bankruptcy. Get the refund and then actually spend the money down.

All right, so that brings up the question, “Well, what do I do when I want to spend my money down before I file bankruptcy?” There are things that you should spend the money on and there are things that you should not spend the money on. If you want to spend the money before you file, it’d probably make sense not to spend the money on something that you’re going to end up having to turn over to the Trustee who can then sell that asset. Sometimes people will do things with their money that they shouldn’t do. I will tell you, for example, that spending the money to pay a debt to a family member, not a good idea. That’s a preferential payment. Okay?

You can spend the money on things that you would otherwise have to spend it on anyway. Stock up on your groceries. Buy some food storage. Buy some things that are not going to perish. Buy supplies for the home, the cleaning products, the paper products, the toiletry items that you use for you and your family. You can also buy and replace or repair appliances. If you have a refrigerator that’s already twelve years old, you’re probably living on borrowed time there, or the refrigerator is, I mean. It might be a good idea to replace it rather than to run the risk that it’s going to go out in the next few months.

Also consider doing any kind of maintenance to the home that would make the home more efficient from the standpoint of energy. You can also spend some money down by paying ahead on your electricity bill. All of those things are good ideas. What about the car? Maybe the car needs to have some new tires or batteries or hoses or any type of maintenance that has been neglected, it should be taken care of before you file the bankruptcy.

There are other things that sometimes people neglect their health. Maybe there’s things that need to be spent to take care of one’s teeth or to get new glasses or to get something taken care of that has been postponed because you haven’t had the money because most of the money has been spent to pay creditors that are now going to be discharged in the bankruptcy. Those are things that you can spend the money on.

A few weeks before your bankruptcy case is filed, stop writing checks on your account, but instead, pay your bills with a cashier’s check or a money order. You want to get that money out of the account immediately rather than having a situation where you’ve written a check, given it to the creditor, and the creditor hasn’t deposited the check or the time involved in that check actually going through the collection process and getting back to the point where the bank actually pays the money out of your account may take a couple of weeks. If you’re trying to file bankruptcy while you’ve got outstanding checks, it can be a problem for you.

I recommend that you stop writing checks a few weeks before your bankruptcy case is scheduled to file so that you can pay with money orders or cashier’s checks. Of course a person has the obligation to disclose all of their assets and all of their debt. Consider that you do actually make that disclosure. Sometimes people have to look at their tax returns and their bank statements for things that they may have had a large cash withdrawal, or they may have had a situation where they have a tax refund that’s coming to them, so that those things need to be taken into consideration with regard to the timing of the filing of the bankruptcy.

If you do have money that you’re going to take out of your account as cash, recognize that you’re going to need to keep receipts for those things that you spend the money on. A cash asset is not an exempt asset. If you take money out of the bank and receive it in the form of cash you have to spend it down and you have to keep receipts for what you spent the money on. Let’s say that you’re filing bankruptcy tomorrow, and today you’re automatic deposit from your employer went into your bank account. That’s a problem because you’re going to have to spend that money down before you file. There may not be enough time for you to get that taken care of before you plan to file the bankruptcy if you’re going to file the next day.

On the day that your bankruptcy case is filed, you do not want to have more than three hundred dollars in a single bank account and you can only exempt one bank account. Now, if a person’s filing jointly with their spouse, they can have one bank account that protects up to six hundred dollars because that exemption can be doubled because there’s two people. One bank account can be exempt up to six hundred dollars. If both spouses each have a separate bank account, they may want to exempt three hundred dollars in one bank account and three hundred dollars in the other bank account.

Those are some things that a person should do before they file their bankruptcy. Again, there’s a list of things that they should not do. I don’t want my clients trying to pay off the debt on a car or some other secured debt before discussing it with me so that I can determine whether or not that’s going to negatively impact their ability to qualify for filing bankruptcy. When we try to determine whether or not somebody’s going to qualify for a chapter seven type bankruptcy, the money that they’re spending to pay for debts that are owed that are necessary for them to keep the asset that they own, for example a car payment, their ability to qualify can be dramatically affected if they have paid off their car.

If the car gets paid off, then we have to look at the income and expenses again and it may be that that debt, which has now been paid off, eliminates that person’s ability to qualify for a chapter seven bankruptcy. Of course, I don’t want my clients emptying out, or taking money out of their 401K or their individual retirement account or any type of ERISA, that’s Employer Retirement Income Security Act, qualified savings, or retirement plans before they file bankruptcy. Those assets, that is your 401K, your individual retirement account, any retirement plan that’s qualified under the Employer’s Retirement Income Security Act is protected in bankruptcy. Meaning that you don’t have to lose that asset. The Trustee can’t touch it and no creditor can take it away from you.

It’s a sad thing when I see somebody come in to see me and how have they been living over the last year is they’ve been emptying out their 401K account and using that money to pay living expenses. That’s okay if they had to do that to pay living expenses, the sad part is is that they’ve been using that to pay credit card debts. I’m thinking, “Don’t do that because you can file bankruptcy and wipe out those credit card debts and protect your 401K retirement account or individual retirement account.” That’s something that I don’t want people to do.

I also don’t want people to take out a second mortgage or a home equity security line of credit against their home in order to pay credit card debts or other unsecured debts that they have. The best thing to do, of course, is to eliminate those debts by filing bankruptcy and not put a debt on your home which may prevent you from being able to keep the home because once you put it on your home, meaning a home equity security line of credit or a second mortgage, then you’re putting your home in jeopardy which may mean that the creditor is going to foreclose on your home.

I always want to have that discussion with my clients before they do something like that. Again, I don’t want people repaying money to relatives. I talked about that briefly as a preferential payment, but that’s something that is a problem because if they have made payments to mom or dad to repay the debt, any time within the last twelve months prior to the filing of the bankruptcy, then what will happen is that when the bankruptcy gets filed the Trustee will be able to go to the person that was paid, your mom or your dad, whoever the money that was owed was repaid to, and require that they return that money to the bankruptcy Trustee so that that money can be then distributed proportionately to all of the creditors of the same class.

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Katherine:

Oh.

Pete Moak:

Although it’s an instinctive thing that people will try to do that and say, “Oh, well I’m going to file bankruptcy, but I don’t want to file bankruptcy against my mom. She loaned me this money and I need to get that money repaid before I file bankruptcy.” No, no, no. Don’t do that because you’re not doing any favors to your mom. The Trustee now is going to try to get that money from your mom and the Trustee has a very strong power and that is to unwind, or reverse, any moneys that you’ve paid to anybody that is a family member during the last twelve months, or indeed, anybody that you’ve paid money to in the last ninety days.

Now, your relatives, it’s a more difficult thing because it’s twelve months from the time that you file bankruptcy. Looking backward twelve months, if you’ve made any payments to a family member to pay a debt that you owed to that family member, then that can be reversed and the Trustee can require them to turn that money over to the Trustee. Now, what happens … Sometimes I have people come in and they say, “Oh, that’s so bad because I just repaid that five hundred dollars that I borrowed from my mom and I want to file bankruptcy now.” Well hold it, before you do that, why don’t you go back to your mom and say, “Mom, I’ve created a problem. Can you get that five hundred dollars back to me and I will use it to pay my living expenses and then I will file bankruptcy?” “Okay, we can do that.” If you’re mom’s able to do that then you’ve saved yourself and your mom from a lot of headache and heartache. Okay?

Of course, a person has to recognize that using credit cards to charge debt … or to charge to buy things just before they file bankruptcy is a problem. Whenever I meet with somebody to talk to them about their plans, I let them know that they should plan on not using their credit cards till after their bankruptcy case is filed. In other words, don’t go buy things on credit when you know that you’re plan is to file bankruptcy to eliminate that debt. In a simple term, they call that fraud.

When somebody is using the credit card knowing that they’re not going to pay it, but rather they’re going to use that credit card and then discharge that debt in the bankruptcy, that creates at fraudulent situation and the credit card company has the ability to go to the bankruptcy judge and say, “Judge, they should not be allowed to discharge that debt because it was incurred at a point in time when they knew they were insolvent, they knew that they didn’t intend to pay the debt and that debt was incurred fraudulently.”

In fact, there is what in the legal world, we call a presumption. A presumption can exist for anybody that you paid money to in the last ninety days prior to the filing of the bankruptcy. If you … Excuse me, any money that you borrowed during the last ninety days prior to the filing of the bankruptcy would be considered a debt that was suspicious or a debt that would be presumed to have been incurred at a point in time when a debtor was insolvent and knew that they had no ability to repay the debt. Don’t go out and incur a loan.

Now, the exception to that is that if you’re going to incur a debt, make sure that the debt is secured by your car or something like that so that you have that ability to continue to keep that debt in good standing. Okay? In other words, it’s not fraud to be able to take out a debt and give your creditor a lean against your car. Okay?

Another thing is that sometimes people are thinking, “Well, I don’t want the Trustee to take my ATC or my boat or something like, so I’m going to transfer it into my friend’s name.” Do that just before they file the bankruptcy. Well, that won’t work because one of the questions that has to be answered on the bankruptcy paperwork is whether you have transferred anything of value to anyone during the last two years prior to the filing of the bankruptcy. If you’ve transferred something to someone and you received fair value for it, in other words they paid you for it, that’s okay. If they paid you what the fair market value of that item is and you spent the money, not a problem. Okay? Sometimes we have to sell assets in order to survive.

If you transfer something to somebody for a dollar, or for a wink and a song, so to speak, no, not good because the Trustee will say, “Hold it. You made that transfer with the intention of getting it out of your hands so that the creditors can’t get to it.” That kind of transfer is also going to be considered to be a fraud and something that the bankruptcy Trustee can reverse. Don’t put things in someone else’s name thinking that you’re going to then be able to keep it. All right?

There’s a few things that people should also remember to do or not to do after their filing of their bankruptcy. Okay? Again, as I’ve said before, after the bankruptcy case is filed, continue to make your payments on your vehicles that you want to keep. Just because you filed a bankruptcy doesn’t mean you get to stop making payments on your car, your truck, or your home. If you want to keep those assets you have to continue to make those payments.

You also are going to get a letter from the Trustee. The Trustee is appointed in every bankruptcy case. This is someone who has the responsibility to examine the debtor under oath, and to review the paper work that the debtor has filed. That is the petition, schedules, statements of financial affairs, and other statements regarding their debts and their assets. If the Trustee asks the debtor for documentation of something, that debtor is responsible to cooperate with the trustee. You can’t just ignore the Trustee’s requests and expect your bankruptcy to go smoothly. It won’t.

Another thing is after the bankruptcy case is filed, the Trustee has an interest in all of the things that you own until there is an abandonment of the Trustee’s interest or the time period has passed that the Trustee is presumed to have abandoned it. There is a issue, for example, if you file bankruptcy, immediately after the bankruptcy you can’t go start selling assets because those assets are part of the bankruptcy estate until the … even if you could claim them as exempt, you got to wait until thirty days after the meeting of creditors because the Trustee has that time period to examine whether or not the property truly is exempt under the statute that you’ve claimed exemptions.

You have to wait a period of time until after the trustee has acknowledged that this is an asset that is not going to be something that he’s able to liquidate, or to sell for the interest of the creditors. You have to wait a period of time before you sell your assets even after the bankruptcy.

Sometimes people are contacted after their bankruptcy case has been filed, they’re contacted by creditors. I tell my clients that the creditors are supposed to be notified by the bankruptcy court and their notice tells them that they’re not allowed to contact the person who’s filed bankruptcy. Sometimes the people will get noticed, or will get … a contact from the creditor. That could be a violation of the court’s order granting a stay, meaning a stoppage, of all types of collection activity. If they have been contacted, they need to let me know so that we can enforce the bankruptcy court’s order telling them that they have to stop trying to collect the debt.

Sometimes people need to be reminded to make sure that they supply the Trustee with a copy of their tax return when they do file it. Here we are in October and you’re tax return for twenty sixteen is not due until April of twenty seventeen. Nevertheless, when you prepare your tax return for twenty sixteen, recognize that you’re going to have to supply a copy of it to the Trustee. Make an extra copy after you’ve signed it and dated it and before you stick it in the mail, make a copy of it, because you’re going to need a copy for the Trustee.

Also, people need to understand that they have to read their mail and read their email. In other words, people who stick their head in the sand can create problems because they don’t know what’s going on and they don’t know that something needs to be responded to simply because they’re in the habit of not opening their mail. It’s silly to have to say that but it’s a good thing to remind people that they do have to read their mail.

Katherine:

Right,

Pete Moak:

Also if there’s a change of address. If you change your address, you’ve got to make sure that there is a notice that’s filed with the court because if you change addresses and you don’t notify the court, you won’t get copies of things that are important for you to be aware of. A change of address is required up until the time the actual bankruptcy is closed. If you do get … After a person files bankruptcy and they have received their notice of the date and time that the bankruptcy case is going to have the meeting of creditors, they need to make sure that they are … that that has been put on their calendar so that they actually show up for the meeting of creditors. It’s very important because if they don’t show up, the Trustee can actually dismiss the case.

Those are some basic things that I advise my clients before their bankruptcy case is filed of things they need to remember to do, and things that they should not do. A lot has been said in the last fifteen to twenty minutes about things that you should do and should not do.

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Katherine:

This, again, has been … I’m dropping my mouth with, of course you want to hurry up and pay back your mom, you don’t want your mom lumped in with the other debtors and it just wouldn’t have been a thought of mine naturally. It makes sense. Especially, just trying to get the debt … but then I don’t want to give my mom a headache and put her in with other debtors.

The things that you talked about that we should stock up on, or the things that we should spend the money on, it’s just things that I could see how people would automatically delete it from their head. It’s not even something you think about, stocking up on food, or replacing things, and knowing how to … Now, you’re asking me to just rethinking everything that I’ve done. You’re helping us to come out of this process of, “Well we had a problem”, to put me in a better position once I file bankruptcy.

I’m saying this to say, “Wow.” I wouldn’t have thought of that. Sitting with you, talking with you about bankruptcy is more than just, “Hey, get me out of trouble now.” You’re showing me how to stay out of trouble, leading up to the filing and after. This is great as always.

Pete Moak:

It’s tricky area that you’d need to have somebody guiding you. It’s like you wouldn’t think of going through a jungle that you’re unfamiliar with without a guide. Okay? Bankruptcy can be a little bit like a jungle. There’s quicksand pits, there’s snake pits, there’s lots of little things that can harm you if you’re not under the protection or in along with a guide that can say, “This is where you need to go. Don’t step here. Step here.” Okay? I protect my people.

Katherine:

I see it. We experience that every time we talk with you. Pete, tell people how to get in touch with you outside of This Needs to be Said.

Pete Moak:

All right. Thank you. This is Walter E. Pete Moak at the Moak Law Firm. My phone number is 480-755-8000 extension 1. That’s where we have people call in to get an appointment. You can talk to me on the telephone or we can schedule an in-office meeting. This is the way you can contact us by telephone. Of course, you can also send an email to info@themoaklawfirm.com, or visit my website, www.themoaklawfirm.com. Very good.

Katherine:

Awesome. Until next time, have a wonderful day.

Pete Moak:

Okay. Thank you again.

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