BANKRUPTCY - WHAT NOT TO DO

 

If you are in a difficult financial situation that is related to, loss of income, tax issues, a recent divorce, and you're considering bankruptcy, you should avoid making certain mistakes that will make the bankruptcy filing much smoother and will help you avoid challenges from creditors and bankruptcy trustee(s). DO NOT:

Transfer Property or Money

People often believe that, if they transfer assets, such as houses, cars and cash, to relatives or friends prior to a bankruptcy, those assets will be safe from the bankruptcy and the creditors. Such belief is completely mistaken and can be quite harmful to one's ability to file for bankruptcy protection. Transferring assets does very little to protect your assets, and can be construed as fraudulent by the court, even if you had no intention of concealing the assets.

Remember: having assets does not mean you can't file a bankruptcy. Also, filing bankruptcy does not mean that you will necessarily lose your assets. Bankruptcy exemptions determine what property you get to keep, whether your home, car, personal belongings or other property. If property is exempt, you may keep it during and after bankruptcy. Each state has a set of exemptions that apply in bankruptcy and most people are able to keep their personal assets when they file for bankruptcy, so hiding assets is completely unnecessary and may lead to rather negative consequences.

Pay Off Certain Creditors

You might think that you'll improve your chances of getting your bankruptcy completed if you attempt to pay off some of your debts before you file. Paying off a creditor prior to filing, however, is misguided and potentially damaging to your case. If you make an out-of-the-ordinary payment that completely pays off a creditor, the payment is referred to as a preferential transfer. What that means is the creditor received payment in preference over the other creditors. In bankruptcy, all creditors similarly situated are supposed to be treated the same, so paying off one creditor in favor of another is prohibited. Oftentimes, the bankruptcy trustee will sue the creditor for return of the money so that it can be equally and fairly distributed among all of the creditors. This process can significantly delay your filing for bankruptcy as well as discharge of your bankruptcy if the preferential transfer is discovered after filing. However, it should be noted that the trustee does not always seek a return of the money. In some cases, the amount of money is too small to justify the effort. You should consult with your attorney about what is considered "too small" because that evolves over time and may depend on the circumstances of your case.

Use Your Credit Cards

One of the first things you should do if you are seriously considering filing bankruptcy is to stop using your credit cards. I am frequently asked if it is possible to use a credit card before filing and then include it in the bankruptcy. My advice is always the same: do not use your credit cards to purchase expensive clothing, jewelry, electronics, or other luxuries such as vacations prior to filing bankruptcy. In fact, I advise against using credit cards at all in the 90 days prior to filing, or longer if possible.

Making purchases on a credit card within 90 days of a bankruptcy filing may lead to an objection to discharge from the creditor whose card was used to make the purchases. This means that the creditor will request that the Bankruptcy Court exempt the entire balance of the credit card from discharge in the bankruptcy and force you to pay the debt after the bankruptcy is completed. This defeats the purpose of the bankruptcy filing, which was to give you a fresh start.

You can use a debit card that is connected to your bank account to pay for the things you need to purchase. However, we would caution clients not to make large purchases just prior to the bankruptcy because we are required to provide the bankruptcy trustee with your bank statements for the month of filing and other statements upon request.

Max Out Your Credit Cards

It may be tempting to go on a shopping spree before filing for bankruptcy, knowing that your credit cards bills will likely get discharged. But the court reviews all of your financial documents, and an uptick in spending right before your file date will be difficult to miss. You might find that these bills do not get discharged, which means you’ll still be on the hook to pay them.

Cash Out Your Retirement Savings

Employees under the age of 59 ½ may be permitted to take a loan against their retirement accounts. If you take a loan against your 401(k), you generally pay yourself back with automatic payments from your paycheck. But using a loan from a retirement account to pay off some of your debt can be a risky move. If, for example, you leave your job before you’ve paid the loan back, the unpaid balance is treated as a 401(k) withdrawal, and you will incur taxes and possibly an early withdrawal penalty if you’re under retirement age. It’s best to talk to your bankruptcy attorney before you decide to take money out of savings to pay bills.

Decide To File On Your Own

It’s not uncommon for people to consider filing for bankruptcy themselves. After all, attorneys charge a fee, and that fee usually must be collected in full before the case is filed. But hiring an experienced attorney could end up saving you money – your case can move smoothly through the process, leaving you debt-free in as little as a couple of months. Having representation provides peace of mind, too. Your attorney handles paperwork, questions from the trustee or any creditors, and court appearances; you need only need to be present for a short Meeting of Creditors. For the first time in a while, you won’t feel the constant stress of finding money to pay your bills.