Despite the rumors and news reports you may read or hear, the truth is that most people facing difficult financial troubles do not think of bankruptcy as a first option. Instead, most of us look to just about any other course of action other than bankruptcy.
Sometimes, however, your honest and good-faith efforts to deal with your debt situation outside of bankruptcy can create hardship or problems if you do decide to file. Here are some common “pre-bankruptcy” mistakes that I tend to see frequently. If you have made one or more of these mistakes, all is not lost - you just may have to alter your strategy and/or timing.
1. DON’T get a Home Equity Loan to pay bills instead of filing bankruptcy.
Your house is not an ATM machine, and you can’t borrow your way out of debt! Many people put off the inevitable by getting a home equity loan to pay off credit cards, then they end up losing their home when they cannot afford the home equity loan payments. If you don’t pay your credit cards, the creditors harass you. If you don’t pay your home equity loan, you lose your house. So, before you get a home equity loan, you should learn how bankruptcy might be able to help you.
2. DON’T Gget a Retirement Loan or cash in an IRA instead of filing bankruptcy.
Many people put off the inevitable by borrowing from a 401(k) or cashing out their IRA in order to pay credit cards. You are not required to do that. Most retirement funds in qualified ERISA accounts are protected, and you may be able to discharge your debts and keep your retirement account. Don't liquidate in an attempt to reduce assets-or gut your retirement account in a futile attempt to catch up bills that you can't get under control. It is better to address the underlying problem and save your retirement, because Social Security may not be around when you need it. If it is around, you certainly will not receive enough to live on comfortably. So, before you reach for retirement funds, you should learn how bankruptcy might benefit you.
3. DON’T wait too long.
It is human nature to put off unpleasant events. Foreclosure, repossession and other collection efforts can be stopped by filing bankruptcy.
4. DON’T leave out any of your creditors.
If you do not list a creditor, then the debt you owe that creditor may not be discharged in bankruptcy. You should list all creditors, even if you have a co-debtor/co-signer or you intend to repay that debt.
5. DON’T reaffirm burdensome debt.
You can reaffirm (keep) any of your debts. Do not reaffirm debts that are unreasonable. Doing so will make it difficult or impossible for you to recover financially. You will end up right where you started without the ability to file bankruptcy for another 8 years.
6. DON’T have too much cash.
Yes, sometimes it is a bad thing. You are limited on how much cash you can protect in a bankruptcy case, but determining just how much cash you can protect requires a review of several factors. That’s the purpose of a Free Initial Consultation.
7. DON’T file Bankruptcy when you have a substantial tax refund pending.
Tax refunds are treated just like cash in the bank. As stated above, there is a limit on how much cash you can protect in a bankruptcy case. This is typically only an issue during the first 5 months of the year.
8. DON’T file Bankruptcy if you are expecting an inheritance.
Property inherited within 6 months after filing bankruptcy is deemed to be part of the bankruptcy estate. If you expect an inheritance, make sure that you discuss this with your attorney.
9. DON'T run up your credit cards or take out cash advances.
Many consumers think that since their debts are going to be discharged, it doesn't matter how much they charge today. Big mistake! Certain debts incurred within 90 days before filing for bankruptcy are presumed to be non-dischargeable. That means that if you use your credit cards recklessly before bankruptcy, you may find yourself obligated to pay those charges.
10. DON'T transfer property out of your name.
Some people think they can protect property like homes, cars, jewelry and cash by giving it to a family member before filing bankruptcy. A bankruptcy trustee may be able to reverse a transfer of property if it was made in an attempt to hide assets from your creditors. It's often unnecessary, anyway, since exemptions may protect property like your home, your automobile and your wedding rings.
11. DON'T pay back loans to friends and family while neglecting your other creditors.
In bankruptcy, you can't choose to treat one creditor better than another. All creditors are entitled to a proportionate share of whatever funds are available to pay your debts. In fact, if you've made payments to a family member within a year before filing bankruptcy, the bankruptcy trustee may be able to take action to recover that money from your family member and distribute it proportionately among all of your creditors. If the Chapter 7 trustee cannot recover those preferences, then he can use that as a basis for objecting to your discharge, which then forces you to come up with the money. Essentially, you will pay the debt twice. So, don’t do it. In a Chapter 13, all it does is increase the monthly plan payment.
12. DON'T ignore pending lawsuits.
Many debtors assume that if they're planning to file bankruptcy, it's not important to respond to or appear in court for pending lawsuits. Until your bankruptcy case is filed, any pending legal action will continue to move forward, and it's important that you protect your rights--and protect your property from liens--until a stay from the bankruptcy court takes over. If a creditor gets a Judgment you may incur more expenses having the lien removed from your property.
13. DON'T withhold information from your lawyer.
Often, clients think they have good reasons for concealing information from their attorneys. You may think that your lawyer won't understand your situation, or that by keeping quiet about an asset or an account, you'll be able to keep more. Lack of information will tie your attorney's hands and create serious risks. You could lose assets, have your bankruptcy case dismissed, or even face criminal charges. And, your attorney may withdraw from your case if you're dishonest with him. Only with complete information can your attorney effectively protect your interests.
14. DON’T miss the 341 hearing.
If you do not attend your hearing (also known as the 341 Meeting of Creditors), then your case may be dismissed. You must bring to the meeting a photo ID and proof of your Social Security number.