No one wants to have to file for bankruptcy, but, sometimes, you may have to travel this road while you get your debts in order. With the help of a bankruptcy attorney, you can also learn what not to do before filing bankruptcy.
Key Takeaways
- Avoid Fraudulent Transfers: Transferring assets to family or friends before filing can be considered bankruptcy fraud.
- Transparency is Crucial: Fully disclose all assets and liabilities to avoid severe legal consequences.
- Consult a Professional: Seeking legal and financial advice is essential to navigate the complexities of bankruptcy successfully.
What is bankruptcy?
Sometimes bankruptcy is the best solution to your financial situation. However, it is important for you to know what not to do before filing for bankruptcy so that you can get the most out of it and back on your feet in no time.
Bankruptcy is a legal process that provides relief to individuals or businesses that cannot repay their debts. When someone files for bankruptcy, they seek protection from creditors and a possible discharge or restructuring of their debts. The goal of bankruptcy is to give the debtor a fresh start while ensuring that creditors receive as much repayment as possible.
In the U.S., there are different types of bankruptcy filings, the most common being:
- Chapter 7 Bankruptcy: This is a liquidation bankruptcy where the debtor’s non-exempt assets are sold to pay off creditors.
- Chapter 13 Bankruptcy: This is a reorganization bankruptcy for individuals with a regular income.
- Chapter 11 Bankruptcy: Often used by businesses, this type of bankruptcy allows the company to continue operating while restructuring its debts.
- Chapter 12 Bankruptcy: This is similar to Chapter 13 but is specifically designed for family farmers and fishermen to reorganize their debts and continue operations.
Bankruptcy can have serious consequences, including damage to credit scores and difficulty obtaining future credit, but it can also be a necessary step for those overwhelmed by debt to regain financial stability. Here are 9 mistakes to avoid when filing for bankruptcy.
What not to do before filing bankruptcy
1- Do Not Transfer Assets to Family or Friends
We understand that you may want to keep as many assets as possible when filing for bankruptcy. However, the consequences of doing so can be harsh.
Selling assets before bankruptcy, giving away property, or selling it for less than it’s worth is considered a fraudulent transfer. Also, transferring assets to a family member or friend is considered bankruptcy fraud.
Other actions you will want to avoid are not disclosing transactions, transferring ownership but still using the property yourself, or conducting a transfer unusually.
2- Avoid Draining Retirement Accounts
If you have saved for years for your retirement but are now in debt, you may want to find relief in taking the money and using it to pay your debtors.
You should know that generally, courts protect your 401(k) and your IRA retirement accounts from bankruptcy unless in extreme circumstances. In other words, your retirement funds are not part of your bankruptcy estate.
3- Do Not Hide or Misrepresent Assets
Bankruptcy is a legal process that requires strict adherence to rules, particularly regarding transparency. When filing for bankruptcy, it’s essential to fully disclose all assets, liabilities, income, and expenses, as mandated by the US Bankruptcy Code.
Failure to do so, whether through incomplete or false disclosure, can lead to severe consequences, including case dismissal, fines, loss of assets, or even imprisonment for bankruptcy fraud. Transparency isn’t just advisable; it’s legally required to avoid serious repercussions.
4- Avoid Repaying Loans to Family or Friends
When considering bankruptcy, it’s essential to understand the concept of preferential payments. These are payments made to certain creditors, such as family members or friends, shortly before filing for bankruptcy. The court views these payments as unfair because they prioritize one creditor over others. If the court identifies such payments, they can be reversed, meaning the money you paid could be taken back and redistributed among all your creditors. It’s crucial to treat all creditors equally to avoid complications and ensure a smoother bankruptcy process.
5- Do Not Ignore Legal or Financial Advice
Navigating bankruptcy is complex and requires informed decisions. Consulting with a bankruptcy attorney or financial advisor is vital to understanding the nuances of your situation. Ignoring professional advice or attempting to handle the process alone can lead to mistakes that could jeopardize your case.
6- Avoid Filing Too Soon
Timing is a critical factor in the bankruptcy process. Filing too soon might mean certain debts are not discharged, or you may miss out on opportunities to maximize the benefits of your bankruptcy filing. For example, if you anticipate medical bills or other significant debts, waiting until these are finalized before filing can be advantageous.
7- Do Not Use Exempt Funds to Pay Off Debt
In bankruptcy, certain assets are considered exempt, meaning they are protected from creditors and cannot be used to pay off debts. These might include retirement accounts, Social Security benefits, and specific equity in your home. Using these exempt funds to pay off debt before filing for bankruptcy is a common mistake.
8- Avoid Making Large Purchases
Making large purchases or luxury expenditures on credit shortly before filing for bankruptcy can raise red flags with the court. These transactions may be scrutinized and could be seen as fraudulent, especially if the court believes you made them with the intent of discharging the debt in bankruptcy.
9- Do Not Assume Bankruptcy is Your Only Option
Bankruptcy should be viewed as a last resort after exploring all other options. Alternatives like debt negotiation, debt settlement, or credit counseling might be viable solutions that can provide relief without the long-term consequences of bankruptcy.
Summary
Filing for bankruptcy can be a challenging decision, but it sometimes becomes necessary to regain control over your financial situation. However, to make the most of this process, it’s crucial to avoid common mistakes that could jeopardize your case. These mistakes include transferring assets to family or friends, draining retirement accounts, hiding or misrepresenting assets, and making preferential payments to specific creditors.
Frequently Asked Questions
When to consider bankruptcy?
Bankruptcy should be considered when your debts become overwhelming to the point where you can no longer manage them with your current income. This is especially true if you are struggling to make even the minimum payments or if you rely on credit just to cover basic living expenses.
How to avoid bankruptcy?
To avoid bankruptcy, start by creating a detailed budget to track your income and expenses. Focus on prioritizing essential expenses and look for areas where you can cut back in order to free up money for debt payments. Debt consolidation is another option to consider, as it allows you to combine your debts into a single loan with a lower interest rate, making payments more manageable and reducing the total interest you’ll pay over time.
