Filing for bankruptcy is a significant financial decision that shouldn’t be taken lightly. While it can provide a fresh start for those struggling with overwhelming debt, certain actions can seriously complicate your case or even make you ineligible for relief. Here are the crucial mistakes to avoid if you’re contemplating bankruptcy.
Don’t Rush to Pay Off Family Members or Friends
It’s natural to want to protect loved ones, but paying back family members or friends before filing bankruptcy can backfire spectacularly. These payments are considered “preferential transfers” and can be reversed by the bankruptcy trustee. The court may force your relatives to return the money, which will then be distributed among all your creditors. Wait until after consulting with a bankruptcy attorney before making any significant payments to anyone.
Avoid Making Large Credit Card Purchases
Making substantial purchases on credit when you’re planning to file bankruptcy can be considered fraud. The court assumes that if you buy luxury items worth more than $725 within 90 days of filing, or take cash advances of more than $1,000 within 70 days, you never intended to pay the debt. These debts likely won’t be discharged, and you could face accusations of bankruptcy fraud.
Don’t Transfer or Hide Assets
Transferring assets to family members or friends, or attempting to hide them, is one of the most serious mistakes you can make. This includes:
– Putting property in someone else’s name
– Selling assets for less than fair market value
– “Forgetting” to list assets on your bankruptcy paperwork
– Moving money between accounts to conceal it
Such actions constitute bankruptcy fraud, which is a federal crime punishable by up to five years in prison and substantial fines.
Resist the Urge to Drain Retirement Accounts
Your retirement accounts, including 401(k)s and IRAs, are typically protected in bankruptcy. Don’t make the mistake of emptying these accounts to pay debts that could be discharged in bankruptcy. Not only will you lose your retirement savings, but you’ll also likely face significant tax penalties and still end up needing to file bankruptcy anyway.
Don’t Continue Using Credit Cards
Once you’ve decided bankruptcy is likely, stop using your credit cards immediately. Continuing to use credit cards when you know you can’t pay them back can be considered fraud. The court may determine these debts are non-dischargeable, meaning you’ll still owe them after bankruptcy.
Avoid Taking on New Debt
Don’t take out new loans or open new credit accounts when considering bankruptcy. This includes:
– Personal loans
– Payday loans
– Home equity lines of credit
– Auto loans
– Store credit cards
New debt acquired just before filing can look suspicious and may not be dischargeable in bankruptcy.
Don’t File Without All Required Documents
Filing bankruptcy requires extensive documentation of your financial situation. Avoid the mistake of filing without gathering all necessary paperwork, including:
– Tax returns for the past several years
– Pay stubs for the last six months
– Bank statements
– Property deeds
– Vehicle titles
– Insurance policies
– Credit card statements
– Collection notices
Missing or incomplete documentation can delay your case or result in dismissal.
Don’t Fail to Disclose All Income
You must report all sources of income when filing bankruptcy, including:
– Regular wages
– Side gig earnings
– Rental income
– Investment returns
– Pension payments
– Social Security benefits
– Child support received
Failing to disclose income can result in your case being dismissed and possibly lead to criminal charges for bankruptcy fraud.
Avoid Making Major Financial Changes
Don’t make any significant financial moves without first consulting a bankruptcy attorney. This includes:
– Selling property
– Cashing out investments
– Taking on new debt
– Changing jobs
– Moving money between accounts
– Making large purchases
These actions could complicate your bankruptcy case or make you ineligible for certain types of bankruptcy relief.
Don’t Try to Handle It Alone
Perhaps the biggest mistake is attempting to navigate bankruptcy without professional guidance. Bankruptcy law is complex and unforgiving of errors. Working with an experienced bankruptcy attorney can help you:
– Determine if bankruptcy is your best option
– Choose the right type of bankruptcy for your situation
– Protect your assets
– Avoid costly mistakes
– Ensure all paperwork is filed correctly
– Navigate court requirements
Final Thoughts
While bankruptcy can provide debt relief and a fresh financial start, it’s a serious legal process that requires careful consideration and proper execution. Avoiding these mistakes can help ensure your bankruptcy proceeding goes smoothly and provides the relief you’re seeking. Always consult with a qualified bankruptcy attorney before making any significant financial decisions when considering bankruptcy.