Filing for bankruptcy is more than just filling out loads of paperwork. Lots of preparation goes into planning, and what you do or don’t do before filing can affect your bankruptcy’s success.
Don’t Rush Into Bankruptcy
When you’re in financial distress, it’s tempting to do whatever it takes to reduce the pressure. However, because you’re rarely entitled to receive a bankruptcy discharge, it’s important to look at other options.
While waiting, you might find face even more severe financial problems, including unemployment, an eviction, foreclosure, car repossession, or illness. If you’ve already filed a Chapter 7 bankruptcy, you might not be able to do it again for many years, possibly subjecting yourself to a creditor garnishing your wages (taking money out of your paycheck), levying (seizing) the funds in your bank account, or taking valuable property.
Less effective Chapter 13 bankruptcy options may be available, but you’d need income to qualify, and you’d be required to pay some, if not all, of the debt during a three- to five-year repayment period.
Don’t Wait Too Long
Sometimes, it’s in your best interest to file for bankruptcy immediately, especially when a creditor has filed a lawsuit against you. Your attorney will look at the complaint to see if it includes a fraud allegation. If so, and the matter goes to judgment, the debt won’t be able to be eliminated in bankruptcy.
Also, once a creditor wins a money judgment, the lien rights that come with it will allow the creditor to garnish your wages, attach your bank accounts, repossess your car, and foreclose on your house. In most cases, if you file for bankruptcy before the creditor wins the case, the bankruptcy will stop the pending lawsuit, wipe out the debt, and prevent any lien rights from attaching.
You should be aware that this is a complicated area of bankruptcy. If you’ve been served with a lawsuit, you should contact a bankruptcy attorney as soon as possible.
Don’t Drain Your Retirement Account
You can protect most retirement funds in bankruptcy. One of the financial mistakes that people regularly make before filing for bankruptcy is withdrawing retirement funds to pay off debt that could be wiped out in bankruptcy.
Before paying off debt in this manner, speak with a knowledgeable bankruptcy attorney. You’ll likely find yourself in a much better financial situation.
Don’t Provide Inaccurate, Incomplete or Dishonest Information
On your bankruptcy paperwork, you’re must provide complete and accurate information about all of your assets, debts, income, expenses and financial history, or risk perjury. If you knowingly misrepresent your information, such as by failing to disclose an asset, you could face criminal penalties, including fines of up to $250,000, 20 years in prison, or both.
Also, if you don’t file all of the paperwork, the bankruptcy court might dismiss your case, or you might have to file additional papers to correct the paperwork and pay more fees. Also, if you leave a creditor out, that debt might not get discharged. If you forget to include an asset, the Chapter 7 trustee might find it and take the property.
Don’t Run Up New Debt
If you rack up debt during the 70 to 90 days before filing bankruptcy, beware (unless it was for necessities, including food, clothing and utilities). The creditor might object to your discharge by arguing that you took out the loan without any intention of paying it back. As a rule, if you took out cash advances or used a credit card to buy a luxury item within 70 to 90 days of filing bankruptcy, then you’ve committed “presumptive fraud” and might not get to discharge the debt.
Don’t Shift Assets
While the bankruptcy schedules ask that you provide information about assets that you own (or will own), don’t be tempted to sell, transfer for safekeeping, or hide assets before filing bankruptcy. If you do, you might be denied a discharge and even be subject to criminal penalties.
You might have sold property to pay your expenses, such as your rent, and doing so isn’t wrong. Be prepared to explain your transactions and provide supporting documentation.
Don’t Selectively Repay Loans
If you pay back loans to friends or relatives within one year of filing, or even other creditors within 90 days of filing, then this may be considered a “preferential transfer.” A preferential transfer can be “undone” in bankruptcy.
The bankruptcy trustee may file an adversarial proceeding to get the money back from the person or entity you paid, and then disburse the money in equal shares to all of your creditors. If you paid an ordinary creditor, then that might not matter to you. You might care, however, if the trustee sues your mom or sister to get the money back.
Don’t File if You are About to Receive Major Assets
You should reconsider filing bankruptcy if you are about to receive an inheritance (within one year), a significant income tax refund, a settlement from a lawsuit, or repayment of a loan you made to someone else. Why? Because once you receive the funds, you might not be bankrupt, especially if you could use this money to settle with creditors and get out of debt on your own. If you find yourself in this situation, contact a bankruptcy attorney to discuss your options.
Don’t Fail to File Income Tax Returns
If you aren’t required to file tax returns, you don’t need to worry about this requirement in a Chapter 7 bankruptcy. If you’re supposed to file taxes, however, but haven’t done so for the two years before filing bankruptcy, you’ll run into problems.
Your tax returns are crucial to determining your current and past earnings and asset holdings, as well as satisfying potential priority tax claims. Without your returns, completing your paperwork, and (if applicable) a Chapter 13 plan will be next-to-impossible and will halt your bankruptcy. For example, there’s no way for the IRS to determine your tax obligations without a tax assessment.
If You Make a Mistake
If you already made one or more of these errors, you should contact a bankruptcy attorney to discuss how to proceed.
For a more detailed explanation of your bankruptcy options, let’s schedule a consultation today.
Moshier Law Office, PLLC
St. Paul, Minnesota