Bankruptcy Do’s and Don’ts

Are you considering filng bankruptcy? Do you have questions about what is ok and not ok to do prior to filing chapter bankruptcy? Read the list below to be sure you are not making a bad situation worse.

Don’t: Make Last Minute Charges
The day you decide to file for bankruptcy protection, you should immediately stop adding to the debt. Don’t charge anything. I’ve been told by clients that they were told by friends or relatives that they could go ahead and “take what’s left” of the credit lines of their accounts before they filed bankruptcy.

What does this mean? It turns out they were talking about charging right up to their credit limit and then filing bankruptcy. This is wrong. First, it’s fraudulent because they know when they’re incurring the debt that they have no intention of paying it back.
Even if it weren’t morally wrong (which it is), it is legally risky.

Under bankruptcy law, creditors can object to a particular debt being wiped away. The typical reason is fraud. When the creditor gets the notice that you filed, it takes a look at your account history. If it sees a bunch of charges right before filing, it will get suspicious.
That doesn’t mean the creditor will automatically cause trouble. If the amounts were small and not for luxury goods, the creditor might not bother about it. But you shouldn’t give the creditor any reason to be suspicious.

Do: Tell Your Lawyer Everything 
You don’t want to be special in bankruptcy
Your goal is to have your case slide on through the system, with no red flags and no questions raised. That’s why it’s important that you tell us everything about our case. We don’t want a client to have taken the advise of a wacky friend and made some last-minute charges before coming into see us and not letting us know about the charges. There are ways to plan around problems — we just need to know that there may be a problem.

Do: Pay Something Toward Recent Charges
For clients who have charged something large recently I suggest they make some payments to that creditor in the meantime. When the creditor looks at your account, it will look at the recent charges, but it will also look at the recent payments. If you make a large charge right before filing and then make no payments, it will look fraudulent. But if you let some time pass and you make a few payments after the last charges, it looks as if you are indeed trying to pay it back. Think of it as putting an extra quarter in the parking meter. It may not be necessary, but it’s a small price to pay to avoid a larger expense down the line.
At the same time, you probably don’t want to pay those other guys anything. You can probably safely stop paying on your unsecured credit cards. Except as described above, you’d be throwing money down the drain.

Do: Pay Your Basic Expenses — And Your Lawyer
You need whatever cash you have for basic needs
We’ve seen clients let rent go unpaid so that they could pay the persistent collector from Visa. You have to take care of your family first and that means keeping a roof over your head. Of course, you should continue to pay your regular monthly expenses, such as rent and utilities. You should also stay current on any car payments on cars you wish to keep.
Another good use of your money right now is to pay your lawyer. Once you’ve decided to file bankruptcy, you need legal help and that requires paying your attorney.

Don’t Take a Loan or Withdrawal From Your Retirement Account
Taking a loan or withdrawal from an exempt retirement account to pay bills is usually not advisable. You certainly should consult with an attorney prior to taking such a withdrawal or loan.

Don’t: Show A “Preference” To One Creditor
Another factor in paying creditors right before filing involves something called a preference. The court doesn’t want you to play favorites and pay a chunk of money to some creditors and not pay the rest. The Trustee can reach back ninety days to recover money paid to general creditors and spread it out more evenly to all of your creditors. The Trustee can also reach back one year if the money was repaid to a relative or insider. So it is not a good idea to pay back your mom a large amount of money right before you file bankruptcy. You might be wondering how the Trustee will know if you paid someone back. It is because you have to tell them, You sign your bankruptcy papers under penalty of perjury. The worst thing you can do is lie.

Don’t: Hide Assets
Some people want to go too far with this and actually hide their assets. They’ll ask if they should take all the money out of their bank accounts before they file. I ask what they’re going to do with it. The answer is usually to stick it under the mattress or give it to their brother to hold for them.

Neither scenario will work. Either way, the money is still their property. They still have to list it on their petition.

Do: Carefully Consider How You Would Justify Selling Assets Before Filing
Other people want to sell off their property right before filing. This can be appropriate, but you should be careful. It might make sense to liquidate some property that wouldn’t be protected. You could sell something and then use the money to catch up on your basic expenses and pay your bankruptcy attorney.
A certain amount of pre-bankruptcy planning is allowed. But I can’t say exactly how much would be allowed in your case. There is a saying in the bankruptcy community: “It isn’t a problem until a pig becomes a hog.”

The main rule is to disclose, disclose, disclose. First tell your lawyer everything about your case. Then, make sure everything is listed somewhere on your petition. The most trouble you can get into with a bankruptcy court is by hiding something.

Do: Get Credit Counseling
It’s now required. There can be a long wait to get an appointment to see or talk to counselor. Your don’t want to be in the position of being ready to file and unable to do so because you haven’t taken care of this.

Don’t: Transfer Property
It is important for you to be aware that transferring title to property before declaring bankruptcy may not be an option. If you transfer property within four years before filing, and do not receive some equivalent value in return, the bankruptcy trustee will avoid the transfer and recover the property or money from the person to whom it was transferred.
This problem often arises when you transfer a title to a vehicle to a friend or relative and aren’t paid for the vehicle or when you quit claim deed your interest in real estate without receiving some payment for your interest.

Do: Keep paying on cars and houses you intend to keep
You should continue making payments on all vehicles and real estate you wish to keep. Remember, you must keep these payments current, the property insured and sign a reaffirmation agreement in order to keep secured property.

Do: Close all bank accounts in banks or credit unions to which you owe money 
If you owe a bank or credit union money and you have any accounts with them, you should close all of you accounts and get all your money out before your bankruptcy is filed. These institutions can freeze your accounts and take the money in them to pay for the debts you owe them.

Do: Have a bank account open 
You should have a bank account open at a bank that you do not owe money before your bankruptcy is filed. Although obtaining future credit is relatively easy after your bankruptcy, opening a bank account is extremely difficult.