Pre-paying mortgage before filing

[desperatio]

A friend of mine is filing chapter 7, but ended up getting about $8,000 from a tax refund. His attorney told them to spend the money on legitimate needs before they file (or officially retained his services). They were wondering if pre-paying their mortgage for a few months in advance was a good idea or not. Would this come back to bite them once the Trustee finds out, or is it allowed? They are, of course, going to ask the lawyer but won't be able to see him for a few more days.

[help1234]

We received just about the same amount in a settlement prior to filing and our lawyer told us NOT to prepay mortgage, car, or student loans. Told instead to find things that needed to be fixed or repaired, new tires for our car, dentist, glasses, and to stock up on groceries etc. But this could be district/trustee specific. Best to ask the attorney before spending it on anything.

[debee]

I agree with help1234. I don't think prepaying the mortgage qualifies as a "legitimate need". Putting cash that would otherwise be available to pay their creditors into an exempt asset on the eve of bankruptcy would probably be seen by the trustee as an attempt to defraud their creditors.

[Mensa1]

IRA contributions will work.

[debee]

If the friend is planning to use AK exemptions in order to get the big homestead exemption, IRA contributions made within a year of filing aren't exempt.

[btbeme]

Groceries, baby, groceries. Take the applicable state or federal monthly allowance for a family of his/her size, multiply by 6 months, and go to Sam's Club and Wal-Mart to spend it on stuff that will not expire or spoil. Paper goods, hygene goods, prescriptions, canned goods for example - but don't think for a minute that the "cash back" at the end of the purchase will be overlooked by the Trustee. Car need brakes or tires? Oil change? Windshield wipers? Auto insurance coming due in 30-45 days? How about funding a school lunch card for a month or two? Bought glasses in the last year or two (or is your prescription expired)? Fill gas tanks the night before the 341 meeting. Got your propane or heating oil or wood pellets for the winter? Need socks and underwear (for yourself and kids, not enough for the neighborhood. Every Trustee know that things can be returned to the store after filing. That is fraud.)? Any house repairs (not improvements) needed? Heating system inspected and repaired and ready for winter? Sprayed for bugs?

Basically, the "smell" test comes down to what your "friend" might normally be expected to spend on necessities every month, plus those reasonably expected necessities of life that pop up on a fairly regular basis (shoes, glasses, car repairs, etc). Most people will not normally make 3 months of mortgage payments in a month, especially near Christmas, so don't expect to get away with that. Avoid anything that has some sort of redeemable cash value, such as gift cards. Avoid gifts (yes, even at this time of year). Keep ALL receipts. Did I say to keep ALL receipts? Make sure your friend keeps ALL receipts, too. And don't forget the receipt - keep it!

The most favorable condition to be in is to be "normal" and fly under the radar. The next best position to be in is being able to explain how and why the expense is reasonable and typical, and that you have the receipt and spending pattern to prove it. The last thing your friend wants to do is buy ammo for a gun that wasn't listed on their filing - I saw that question pop up at a 341 hearing I attended. Glad I wasn't him, because I imagine they crawled up his orifice with a magnifying glass after that.

Be Ye Warned: an $8000 tax refund may trigger a question regarding tax witholding for next year, expected tax refunds, and/or questions or amendments necessary on their income schedule. Tax refunds (real or expected) = income.

[tcreegan]

Hi all, Hi desperatio,

Pay on life's necessties .....rent, Medical, vision, dental, car repariers, house repairs, grocery, WallWart. work around the house, pre-pay utilites, pre-pay insurance policies ......just nothing in the luxury zone.

Do NOT pay on houses, cars, student loans, any secured debt, any non-dischargeable debt, any other debt

If you do have $$ left over, let the trustee decide on who gets what.

Just be sure you can document everything, recpts, canceled checks, bank statements, those sorts of things.

Well, I'd better quit while I'm ahead, starting to not make sense to me...!

Tom in Colo