How to prepare for Bankrtupcy
- DO NOT BE TOO QUICK TO FILE
You are only allowed to file a Chapter 7 Bankruptcy once every 8 years, so you want to make sure that you are getting as much debt as possible discharged. For example, if you are currently receiving medical care and some of your debt involved medical bills, you would want to make sure you are done treating so that you can include all of your medical debt in a bankruptcy. If you file before you are done treating, you will not be able to include in the bankruptcy any debt that you accrued after you filed for bankruptcy protection.
- BUT DO NOT WAIT TOO LONG
If you are being sued or someone is trying to garnish your wages, you don’t want to wait too long to file for bankruptcy protection. If you wait until someone has a judgment against you, they can begin garnishment proceedings and possibly garnish some of your wages before any bankruptcy protection kicks in, if you wait too long to file.
- DO NOT TRANSFER OR HIDE ASSETS
You will have to list all of your assets as part of any bankruptcy filing. Some people are tempted to hide, transfer, or sell assets before they file bankruptcy. For example, I have many people that want to (or already have) transferred vehicles to other parties (usually related parties). Keep in mind that the bankruptcy trustee searches for assets that have been sold or transferred as part of their normal process when a person files bankruptcy. If it is found that you moved or transferred assets to someone else’s name, and you did not receive reasonable compensation for the property, it can be assumed that you were trying to hide assets from the trustee and your bankruptcy can be denied (and you may also be subject to criminal proceedings).
- DO NOT FILE IF YOU ARE GOING TO RECEIVE A LARGE PAYMENT SOON
If you are about to receive an inheritance (within one year of filing), a significant income tax refund, a settlement from a lawsuit, or repayment of a loan you made to someone else, you may want to delay filing. Once you receive funds, you may no longer be considered bankrupt and the bankruptcy trustee may want to use your funds to fully pay all of your creditors.
- DO NOT USE RETIREMENT FUNDS
Many people, in trying to avoid filing bankruptcy, will borrow against their retirement or just take the retirement funds early. If you do withdraw retirement funds early, you are subject to taxation and a penalty. Your retirement funds are protected by the bankruptcy rules, so you will not have to forfeit any of your retirement savings in order to file bankruptcy. Because your retirement funds are protected, it is not a wise decision to cash out your retirement accounts and use them to pay off debt that would have otherwise been dischargeable in a bankruptcy.
- DO NOT INCUR NEW DEBT
If you run up debt during the 70 to 90 days before filing bankruptcy, beware (unless it was for necessities, such as food, clothing, and utilities). The creditor might object to your bankruptcy discharge by arguing that you took on the new debt without any intention of paying it back. As a rule, if you take out cash advances or use a credit card to buy a luxury item within 70 to 90 days of filing bankruptcy, then you’ve committed “presumptive fraud” and might not get to discharge the debt.
- DO NOT SELECTIVELY REPAY CREDIT CARDS OR LOANS
If you pay back loans to friends or relatives within one year of filing, this may be considered “preferential treatment” meaning that you preferred one creditor over another (i.e. if you pay off your mom or sister in a lump sum because you owed them money). Also, many people want try to keep selective credit cards and think that if they pay that card off before filing, they will be able to keep that credit card. Keep in mind that if you pay any creditor (credit card or relative) more than you are paying any of your other creditors, that is considered preferential treatment of that creditor. Any preferential payment can be undone by the bankruptcy court.
The bankruptcy trustee may file an adversarial proceeding to get the money back from the person or entity you paid and then disburse the funds in equal shares amongst all of your creditors. If you paid an ordinary creditor, then that might not matter to you. However, you might care if the trustee sues your mom or sister to get the money back.
- DO NOT FORGET TO FILE TAXES
You cannot have any prior years of unfiled tax returns when you file for bankruptcy protection (however if you are not required to file taxes, such as if you only receive disability, you do not need to worry about this requirement). Also, if you are filing a Chapter 13 bankruptcy, the trustee will ask to see copies of your tax returns each year and will take any refunds that you receive during the repayment period of your Chapter 13 plan.
If you are in need of bankruptcy advice, please contact Nichole Oblinger at Anthem Law for a free 30-minute phone consultation. 623-551-5457