By: Lance T. Denha, Esq.
When someone is considering or contemplating filing for bankruptcy, there are certain items that they may want to consider avoiding before and after the filing which would have a significant effect on the outcome of the case. The following are some Pre-Bankruptcy planning tips and some of the common mistakes to avoid when filing for bankruptcy:
1. Talk to a Bankruptcy Lawyer to Consider Bankruptcy an Option
Prospective bankruptcy candidates typically have no idea of what they are getting into which is why 90% of personal, consumer bankruptcy cases are represented by an attorney. The bankruptcy laws, process and hearings are not to be handled by a layperson. Even the bankruptcy courts strongly urge every petitioner to have qualified legal representation. The courts will not give a debtor filing a bankruptcy case on their own any slack if they mess up, they will just dismiss your case and move on.
There are many people experiencing debt problems that never consider bankruptcy as a debt relief option. When involved in a divorce, facing a foreclosure, repossession, or simply have overwhelming credit card debt, some may not even contemplate filing for bankruptcy protection. Bankruptcy provides a chance for an honest debtor to wipe out their debts and start over again.
Once it becomes overbearing and overwhelming to manage significant debts, whether it be in the form of a divorce, facing a foreclosure, repossession, or simply having an abundance of credit card debt, some may not even contemplate the filing of a bankruptcy protection or may, even worse, delay and procrastinate. One must remember that if one doesn’t act timely, they may lose their home, vehicle or wages.
3. Using HELOCS or Retirement Accounts to Pay off Debt
Using a Home Equity Loan (“HELOC”) or your Retirement Account to pay off your debts is usually never a good option. When using a home equity loan to pay off credit cards for instance, a debtor is essentially making unsecured debt secured. Many people who take out a home equity loan to pay off loans may end up losing their home because they can’t afford to make payments on the home equity loan. Each case is different, however should a debtor choose to take out a home equity loan to settle outstanding credit card debt at a significantly reduced settlement balance, this may not necessarily be a bad idea if the debtor is settling for pennies on the dollar.
As far as taking out money from your retirement account, it is almost never a good idea to raid a 401(k), IRA, or other qualified tax deferred retirement account to pay unsecured debts. Why? A few reasons, 1) If the debtor ends ups filing for bankruptcy, their pension money is almost always is going to be considered “exempt” or sheltered property which creditors are not able to attach their rights against, and 2) if one takes an early withdrawal, they will almost always have an early withdrawal penalty and possible income tax liability. Therefore if one adds the early withdrawal penalty to the I.R.S. tax liability to pay off debt, it can result in costing such person much more than simply addressing this debt under a bankruptcy plan. Again each scenario is different so its advisable to discuss this option with competent counsel.
4. Do Not Try to Hide Property
Too many bankruptcy petitioners try to deceive the trustee by giving property away to a family member or friend in an attempt to keep it out of the bankruptcy estate. This is a very bad idea. As one goes through the filing process, they are petitioning under oath that all of the information has been completely and honestly reported. Should a debtor get caught trying to transfer assets in a fraudulent way, not only will his or her case be thrown out, but they may face criminal charges. It’s simply not worth the risk to try and defraud the court.
5. Failing to List Your All Creditors
If you do not list a creditor, then the debt owed to that creditor may not be discharged in bankruptcy. One should list all creditors, even if a co-debtor or co-signer has the full intention to repay such debt.
6. Transferring Assets Prior to Filing
If one has ownership of real estate, motor vehicles or certificates of deposit, and transfers ownership for the purpose of frustrating the claims of creditors, the bankruptcy trustee can file suit in Bankruptcy Court to “avoid the transfer.” Transferring assets before filing bankruptcy can be construed as fraudulent and those transfers can be reversed or recovered by a trustee if its deemed to be fraudulent. Even if debtors have never touched the asset and never considered it one’s own, the Bankruptcy Court very well might consider that asset to be part of the debtors bankruptcy estate and may try to seize it.
7. Purchases prior to Filing For Bankruptcy
Any credit card transaction occurring within 6 months prior to filing as well as certain balance transfers, cash advances, or significant purchases up to 24 months before filing could be severely scrutinized by a bankruptcy trustee. One may encounter problems associated with these types of purchases prior to filing if the creditor objects to discharge claiming that such debtor was insolvent at the time of a purchase and never had the intention of paying back such debt.
8. Repaying Family Loans Prior to Filing
Often, a debt payment to a family member made within the year prior to filing is considered a preference and can be reversed by the bankruptcy trustee. Debtors cannot decide to pay certain creditors while choosing not to pay others, especially when such creditors are related to debtor or received some type of direct or indirect benefit from making such preferential payments. A bankruptcy trustee can demand that a creditor who received a preference payment must return it to the bankruptcy estate.
9. Filing When Expecting a Large Tax Return
Debtors may or may not be better off filing after receiving and using tax refund money as tax refund money is treated like cash. Therefore this type of asset may or may not be exempt under state or federal law. Debtors should go over these facts with their attorney in order to decide whether an expected income tax refund will be considered exempt.
Ultimately, the debtors attorneys should be the one advising and knowing when to file and how to make the most of debtors case, however these pre-planning tips can go a long way in ensuring the most cost effective and trouble free and successful bankruptcy case filing.