Mistakes to Avoid Prior To Bankruptcy

by Tracy Hirsch

Below is a list of common mistakes that clients make before filing bankruptcy. These mistakes can have a detrimental affect on a consumer’s ability to obtain relief under the bankruptcy code. If you are anticipating filing a bankruptcy petition, please review the list carefully and as always, if you are unsure as to whether an action will affect your bankruptcy filing, seek the advice of a professional.

1. Do not transfer property out of your name. Oftentimes an individual who is contemplating filing bankruptcy fears that they will lose assets to the bankruptcy estate. More often than not, this is not the case. In fact, transferring an asset out of your name before the filing of a bankruptcy can actually cause you to lose an asset that would have otherwise been protected. This type of transfer can be construed as fraud, allowing the trustee to take the property from the individual it was transferred to and sell it for the benefit of your creditors.

2. Do not repay debts to relatives. Many debtors owe credit card companies as well as family members. While it is understandable that most individuals do not want to file bankruptcy against their relatives, repaying a debt to a relative before the filing of a bankruptcy petition could be bad news. Repaying debts to relatives before filing bankruptcy is considered a “preferential payment” and gives the bankruptcy trustee the right to recover funds from the person that was paid and distribute the money evenly among all of your creditors.

3. Do not cash out your 401K or other retirement plan to pay debts. Most qualified retirement funds are protected assets in a bankruptcy filing. Cashing out or withdrawing funds from these types of accounts not only puts your retirement funds at risk, it also has the potential for creating tax liabilities that will not be eliminated in bankruptcy.

4. Do not incur debts or make charges on your credit cards. Once you have made the decision to file bankruptcy, it is improper to incur additional debt that you do not have the intention or ability to repay. Creditors may object to those charges and may be able to have them excluded from your bankruptcy discharge.

5. Do not borrow money against your home. Many people think that if they have any equity in their home when they file bankruptcy then they will lose their home. This is not the case. All states have exemptions that cover at least some of your equity. Kentucky uses federal exemptions which allow each debtor to protect $20,200.00 in equity (that’s $40,400.00 for jointly owned property). In Indiana, each debtor can have up to $15,000.00 of equity and still protect his home.

6. Don’t hide information from your attorney. Your attorney can only provide proper legal advice if you provide him or her with truthful and accurate information. Failing to disclose income, expenses, assets, debts or any questionable actions for transfers could prove to be a costly mistake. Failing to disclose pertinent information could result in loss of assets, denial of your discharge and even fines or imprisonment.

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