BANKRUPTCY MISTAKES

BANKRUPTCY MISTAKES

Do not make these mistakes.  They can cause your case to be delayed and even cause the judge to deny your discharge.

1. Don’t Pay Back Loans To Relatives Or Business Associates Before Filing Bankruptcy.

People who are thinking of filing for bankruptcy often feel the desire to pay back loans to friends and family before filing the petition. This is understandable, but it is a big mistake. Under bankruptcy law all creditors who are in the same position must be treated equally. Bankruptcy law views your debt to Uncle Bob as just like your debt to Capital One Visa. You can’t pay Uncle Bob first. If certain creditors are paid ahead of others this is called a “preference.” If a preference occurs the bankruptcy trustee can get a court order forcing Uncle Bob to return the money. This is not good for family harmony.

Even worse than a “preference” is a “fraudulent transfer.” If the court finds that money was paid to a relative in a deliberate attempt to hide assets, this can be found to be a fraudulent transfer. This can result in the complete denial of your discharge, and possibly even criminal charges. This is a very serious matter. If you try and hide things from the court you could end up going to jail.

2. Don’t Transfer Property Out Of Your Name.

Do not transfer ownership of valuable items to family members or others just before filing bankruptcy. If this is discovered the bankruptcy trustee will seek to reclaim this property and sell it for the benefit of creditors. Such transfers of title are frequently unnecessary anyway, because bankruptcy law often provides protection for your home, car, and other valuable items. As with everything in bankruptcy, the key is to be fully honest, disclose everything, and put your cards on the table.

3. Don’t Drain Your 401k To Try And “Catch Up” On Your Debts.

Most retirement funds are protected in bankruptcy.  You will ordinarily be able to wipe out all your debts and still keep your retirement accounts. It is not a good strategy to withdraw money from those accounts and use it to try and catch up on bills that you can’t pay. Most of the time bankruptcy is still required anyway even after you spend the money from the 401k, and then you will have the same bankruptcy but your retirement account will be gone. Don’t make this common mistake.

4. Don’t Wait To File Bankruptcy Until After A Foreclosure Or Repossession.

People often struggle for years under an impossible debt load until they are forced to take action due to a foreclosure or repossession. But this is a wasteful and painful road to travel when your debts are too heavy to carry. If bankruptcy is going to be necessary, it is almost always better to file it sooner rather than later. There is no benefit to be had by spending thousands of dollars and suffering tremendous stress and anxiety chasing after debts that can never be paid. Under U.S. law you have a right to a second chance and fresh start through bankruptcy. Your family will thank you if you get the information you need as soon as possible. Don’t wait until you are faced with an emergency.

5. On The Other Hand, Don’t Rush Into Bankruptcy When It Is Better To Wait.

Although it is usually better to file bankruptcy at the earliest time, in some situations it can be just as important not to file too soon. For example, if you are pregnant or you can see that certain medical bills are likely to arise in the near future, then it is probably best to hold off on filing. It makes no sense to discharge your credit card debts in bankruptcy and then immediately face crushing and unaffordable long term medical bills.

Remember, you can only file chapter 7 once every eight years.

Another reason to wait before you file is if you are expecting an inheritance or large tax refund. Under bankruptcy law a tax refund is treated like cash and depending on your state exemptions you may not be able to keep it. If you are expecting to receive cash of this nature it might be better to hold off on filing until after you receive the money. You can then use this money to pay down non-dischargeable debts like student loans and child support arrears. That way when the bankruptcy process is complete you will be left with a lighter burden as you move forward.

The point here is that sometimes in bankruptcy, timing is everything. There is nothing improper about using the time factor to your advantage within the boundaries of what is legal under the Bankruptcy Code. People do this all the time in relation to tax matters and no one considers it to be improper. You should check with your bankruptcy attorney to get advice on timing under the particular circumstances of your case.

6. Don’t Use Credit Cards Or Take Cash Advances Right Before Filing.

Once you have seriously considered bankruptcy as an option you should immediately stop the use of all credit cards. Bankruptcy law does not allow you to run up credit card charges that you know you will not be able to repay. Credit card use in the months before filing bankruptcy can result in a denial of discharge for some or all of your debts.  It can even result in criminal charges.

7. Don’t Disregard Pending Lawsuits.

Sometimes people assume that if they’re planning to file bankruptcy, they don’t have to respond to or appear in court for pending lawsuits. This is not true.  If lawsuits are allowed to continue before the bankruptcy is filed, this can result in liens against your property. After the petition is filed you will be protected by the “automatic stay,” but until that time be sure not to ignore legal actions take against you.

8. Don’t Keep A Large Amount Of Money In Your Bank Account On The Day You File For Bankruptcy.

If you have more than a minimal amount of money in your bank accounts on the day you file for bankruptcy, the trustee may take it and distribute it to creditors. You should time your bankruptcy filing so that the lowest amount possible is in your bank account the day (and hour) that you file. Keep in mind that you cannot simply withdraw the cash to reduce your account. Rather, you must empty your account, as much as possible, by using it up paying normal living expenses and non-dischargeable debts.

As a related matter, it is a good idea to move your bank account if you have your account with the same bank that issued your loans or credit cards. Once you file bankruptcy that bank has the right to “setoff.” This means that the bank can take the money in your account to cover your loans on the day you file. Therefore, if the bank is your creditor you should move your money to a different bank before filing.

9. Don’t Fail To Attend Your Hearing(s).

In most cases, you must attend just one bankruptcy hearing in a chapter 7, and two in a chapter 13. If you don’t attend these hearings, the court could dismiss your bankruptcy.  This would mean that you would lose any legal protection you had from the bankruptcy and you would go back to the same position you were in before filing.

10. Don’t Withhold Information From Your Lawyer.

No one likes to reveal the details of their finances, especially when dealing with a bankruptcy. But it is very important to understand that honesty and full disclosure are absolutely essential. The law is actually on your side in bankruptcy. If you follow the rules, bankruptcy is a powerful tool that can give you a second chance and a fresh start.  But in exchange for that fresh start, bankruptcy law requires that you put all your cards on the table. Your bankruptcy lawyer must be aware of all the facts in order to protect your interests.  Lack of information creates serious risks.

It is also important to remember that you will sign your petition under oath, expressly stating that you have fully disclosed all relevant facts. If you hide facts you can lose assets, have your bankruptcy case dismissed, and even face criminal charges. Your lawyer also may withdraw from your case if you are not completely honest.

Remember, withholding information from your lawyer is never the right choice.  You will never obtain a better result by hiding information, and you will risk the possibility of serious negative consequences.