Bankruptcy offers several advantages when your debts become insurmountable and your creditors close in on you. It also can make your life easier after the bankruptcy process is over. The best bankruptcy outcomes are the ones when you avoid problems that can arise from mistakes.
Here, we consider some avoidable errors that can complicate or even preclude your ability to use Chapter 7 or Chapter 13 bankruptcy, starting before you file and continuing all the way through to what to look out for once the bankruptcy court discharges your debts and closes your case.
If you want legal guidance on what you can not do before or during bankruptcy, call Stone Rose Law at (480) 739-2448 or use our contact form.
The dos and don’ts of bankruptcy begin before you even file your petition with the bankruptcy court. Here are some behaviors to avoid:
Bankruptcy court judges will be on the lookout for debtor behaviors that appear inequitable or suspicious. One of these is loading up on debt, especially unsecured debt like credit cards or cash advances, shortly before filing.
The period the bankruptcy court will scrutinize especially carefully is up to 90 days before you file your petition. Large purchases you make during this time may not qualify for bankruptcy protection, especially if they are for non-essential or luxury items as opposed to necessities.
The court can consider such purchases to be presumptive fraud. Creditors may also challenge such debts as being non-dischargeable. Not only can this lead to the court refusing to allow such a debt to fall under bankruptcy protection, but it might even lead to the dismissal of your petition.
Some people will, understandably, resort to all other financial options before they resort to bankruptcy, including depleting their savings first. However, such a strategy is unnecessary for most of your retirement funds, like an individual retirement account or an employer 401(k). These accounts are considered exempt assets and are protected from the collection of creditors, which also means they are protected from bankruptcy liquidation. It is recommended to preserve these protected assets since your creditors can’t touch them.
Another mistake some debtors make is trying to protect some of their creditors compared to others when they know they will have to file for bankruptcy. You may feel like you are doing the right thing, for example, by trying to protect family members or friends you have borrowed money from by paying them back before filing.
Unfortunately, doing this can get your family or friends into trouble with the bankruptcy court under the “preferential transfers” rule. Any payments to friends or family in the year leading up to bankruptcy may be subject to the “claw back” provision. This means the Trustee can seek legal action to recover all payments you made in the last year to that friend or family member. Once the funds are recovered, they will be distributed to your creditors in your bankruptcy estate. Thus, paying back friends and family can lead to more harm.
It is also recommended to stop making payments to unsecured creditor a couple months before filing since the “preferential transfers” rule includes all your general unsecured creditors, such as credit cards, personal loans, or judgments.Particularly if you pay off some creditors or pay more that $600 accumulative within 90 days of filing your petition, the Trustee can recover the the funds paid to redistribute pro-rata between all creditors. The Trustee can do this through an adversarial proceeding.
Not all debts are always dischargeable in bankruptcy. Examples include:
Trying to use bankruptcy to avoid paying these debts is ordinarily unadvisable. It is best to consult with an experienced bankruptcy attorney to seek alternatives to bankruptcy if you have these kinds of debts.
The best practice for filing for bankruptcy is complete transparency in accounting for your income, debts, and assets. Attempts to selectively exclude debts and assets from your petition can backfire on you.
For example, concealing a debt means it will not be dischargeable, so the creditor can still come after you for it even after you complete the bankruptcy process. If you want to repay an otherwise dischargeable debt, it is better to seek to reaffirm or redeem it through the bankruptcy court than to hide it.
To protect creditors against such unfair transfers, the bankruptcy court can look back on your last 10 years of financial transactions. Information the court can scrutinize includes:
Getting caught trying to hide assets from the court by not reporting things like offshore bank accounts or sums of cash, or selling or otherwise transferring assets to family members or others, can get you into serious legal trouble, including:
One possible exception to this rule is if you are selling assets to raise money to pay for essentials, like your mortgage, rent, groceries, or utility bills. You should still be ready to explain such transfers to the bankruptcy trustee, including providing supporting documentation.
In general, you must have all your federal and state tax returns filed before filing bankruptcy, or the case may be dismissed. If you are required to file federal taxes, you must have returns filed for two years before filing for Chapter 7 bankruptcy. For Chapter 13 cases, you must have the returns filed for all four years prior to your filing. This is in Publication 908 (2024).
If you are behind in filing your past taxes, this is something to discuss with your bankruptcy attorney before starting your petition preparation.
If you aren’t required to file tax returns, for instance, you receive disability insurance, you don’t need to worry about this requirement in a Chapter 7 bankruptcy. However, if you’re supposed to file taxes but haven’t done so for the two years before filing bankruptcy, you’ll run into problems.
Tax returns are crucial to determining your current and past earnings and asset holdings and satisfying potential priority tax claims.
Timing can be an important consideration when considering bankruptcy, and consulting with an experienced bankruptcy lawyer can help you avoid potentially costly errors.
Depending on your circumstances, even if you are experiencing debt problems now, it might be advantageous to wait before filing for bankruptcy. For example, if you anticipate even more financial problems coming your way, you may want to wait to file.
Some timing considerations that can lead you to consider holding off on filing include:
If you file for Chapter 7 bankruptcy before these events happen, you may not be able to have any related debts discharged.
In other situations, if you expect to receive substantial assets, this can also be a reason to hold off on declaring bankruptcy.
If, for example, you are expecting:
These sources of funds might be enough to avoid filing for bankruptcy protection. Also, waiting to report such sources of income until after filing might be viewed with suspicion by the bankruptcy trustee.
Just like you can file for bankruptcy too soon, some cases exist in which you might wait too long to file. Some of these situations include:
In some of these situations, like wage garnishment or a legal judgment against you, filing earlier will either stop the garnishment or preclude filing a judgment lien against you.
If your creditor has filed a lawsuit against you, filing for bankruptcy will stop the case from proceeding further and could lead to a discharge of the underlying debt.
If you are subject to home foreclosure, depending on which chapter, the filing could delay the bankruptcy or even cure the default if timed correctly. Filing the wrong chapter too soon, may leave you no option to save your home.
In all of these situations, your bankruptcy attorney can give you valuable guidance on the timing of a bankruptcy petition filing.
Although it is possible to represent yourself in the bankruptcy process, the US Bankruptcy Code and local bankruptcy court rules can be complex to interpret and apply. If you make mistakes while representing yourself at any point, including the preparatory stage, this could lead to:
The money you may think you are saving by not having expert legal assistance in bankruptcy can easily become less than the money you may lose if you do not handle your case properly on your own. Having an attorney on your side in bankruptcy avoids the risk of needless errors and gives you peace of mind knowing that an experienced bankruptcy professional is handling your case.
Once your bankruptcy filing is complete, there are a few other things you should be careful not to do while the bankruptcy court is considering your case.
If your financial information changes during the bankruptcy, like you receive an inheritance or a pay raise at your place of employment, you must inform the bankruptcy trustee of the change. If the trustee discovers such changes independently, this could cause delays in your case.
Bankruptcy does not mean you can stop paying debts that cannot be discharged in bankruptcy. For example, if you have spousal or child support payment obligations, you need to keep paying these even after filing your petition.
Once the bankruptcy court has discharged your eligible debts and closed your case, to avoid possible future financial problems that might even lead you to need to file for bankruptcy again later, here are some practical suggestions.
Especially with a fresh start Chapter 7 bankruptcy, once you are financially free again, it can be tempting to succumb to the “low monthly payments” trap that puts so many Americans into unmanageable debt. The best way to keep your financial freedom and avoid future debt problems is to be judicious about whether you use financing for purchases and the kind of financing you use.
Many times, a key reason why people must resort to bankruptcy protection is because they do not know where their money is coming from or going. If you do not have a budget, it is more likely that you will overextend yourself financially and find yourself falling behind.
Even if it is just a simple spreadsheet you prepare on your own, once you are out of debt after bankruptcy, do not neglect to keep careful track of your finances. Not only can a budget enable you to better plan to make consistent bill payments on time, but it can also give you insights on where you might be able to save money, so if you have a financial emergency, you will not have to resort to financing to pay for it.
When you are under enough financial stress to be thinking about bankruptcy, this is the time to reach out for expert legal guidance on your options. An Arizona bankruptcy lawyer can help you clearly understand your financial situation.
If you need bankruptcy protection, a Stone Rose Law bankruptcy attorney can give you the expert legal representation you need to avoid problems, so the process goes as quickly and with as little difficulty as possible.
Call us at (480) 739-2448 to talk with a bankruptcy law specialist. You can also reach us through our contact form to ask a question or schedule a free consultation.
