Things to NOT Do Before Filing Bankruptcy
1. Do NOT Transfer Money or Assets.
Sometimes people worry that they will have to give up all their personal belongings and they transfer assets to someone to hold for them before they file a Chapter 7 or Chapter 13bankruptcy petition. While it is true that all of your property becomes property of the bankruptcy estate when you file bankruptcy, there are steps you can sometimes take prior to filing to improve your ability to retain your property. A good bankruptcy lawyer will use the federal or State exemptions to help you keep your personal property. However, to give valuable property to a spouse, family member or friend before bankruptcy could be considered a fraudulent transfer by the trustee. Such conduct may result in a denial of a discharge, avoidance of the transfer, or in serious cases, criminal prosecution.
2. Do NOT Borrow From Your 401k, IRA, or Retirement Plan.
A frequent mistake my clients make is to borrow or withdraw from their retirement accounts to pay off credit card debt. This is mistake for three reasons. First, it is much easier to deal with credit card debt in bankruptcy than it is to repay a 401k loan because credit card debt is considered unsecured debt and is generally dischargeable in bankruptcy. A 401k loan must be repaid. Second, retirement funds are generally protected in bankruptcy. Section 522(d)(12) permits the debtor to exempt retirement funds to the extent they are in a fund or account that is exempt from taxation under sections 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue code. However, once funds are distributed or withdrawn from any qualified trust account, they may lose their protection. Finally, the purpose of your 401k, IRA, or retirement plan is to fund your retirement. By withdrawing from your retirement account now, you will not only face steep taxes and penalties, but you will impoverish yourself in retirement by robbing your retirement account to pay off credit cards.
3. Do NOT Borrow Against Your Home to Pay Unsecured Debt.
Do not take unsecured debt (credit cards, personal loans, and medical bills) which is dischargeable in bankruptcy and turn it into a mortgage. It is far easier to deal with unsecured debt in bankruptcy than it is to pay off a mortgage or risk losing your home.
4. Do NOT Pay Off Family or Friends First.
One of the things many people do when they get into financial trouble and start considering bankruptcy as an option is to pay off debt owed to people they know first. Under the Bankruptcy Code, all creditors must be treated equally. This means that whether you owe your Aunt $500 or owe $500 to Visa, the law treats them equally. If you pay off a loan owed a friend or family member between ninety (90) days and one (1) year before you file bankruptcy, the trustee could go to your friend or family member and demand they return the money that you paid them before you filed bankruptcy. A safer choice is to talk to your lawyer before making any payments to creditors.
5. Do NOT Wait to Seek Legal Advice.
It can be difficult to admit that you need help. However, I frequently see people who have ignored their finances for so long that the worst has happened – they have lost their home or have let the stress of their debt destroy their marriage. It can be scary to talk to a lawyer about your finances, but a lawyer can help you plan ahead and strategize to preserve your assets. Bankruptcy is not easy, but it does not have to be the end of the world. It is much easier to move on with your life without the fear of debt collectors and creditors hounding your every step.