By John W. Lee
Having been a bankruptcy attorney since 1998, I have had the opportunity to see debtors make the same mistakes time after time.
There are numerous pitfalls for a debtor in bankruptcy, but here are my top five things to watch out for:
1. Do not run up credit card balances immediately prior to filing a bankruptcy. It seems many people are of the mindset that if they are going to file bankruptcy they might as well “charge up” or “max out” their credit cards before they file. This is a terrible idea because to can be considered bankruptcy fraud and render the debt non-dischargeable in bankruptcy. There are periods of time prior to a bankruptcy where if you are incurring debt it is presumed to be abuse. I recommend that debtors stop charging on their credit cards at least 90 days prior to filing bankruptcy. With really large purchases, especially of luxury items, a debtor may need to wait an even longer time before filing. The concept of waiting to file bankruptcy after borrowing money does not just apply to credit cards but any type of debt. In most cases, the best advice is to wait at least 90 days after incurring any type of debt.
2. Do not sell property immediately prior to filing bankruptcy. This is not to say that you cannot sell property in any circumstance, just that any sale of property prior to filing a bankruptcy will be scrutinized by the trustee and could lead to unintended consequences. The Chapter 7 trustee has the right to overturn or undo a sale that he believes was for less than full value or diminished the value of the bankruptcy estate. For example, if you sell a car for $2,500.00 that had a blue book value of $7,500.00; then the trustee could pursue the purchaser for the car to get the car back. Sometimes a debtor will try to outsmart the system by transferring property to a family member or friend to “get it out of their name” prior to filing. You should not transfer property out of your name, especially for less than full value, immediately prior to filing bankruptcy.
3. Do not give money to a family member immediately prior to filing bankruptcy. Not only can you not give money to a family member prior to filing bankruptcy, you also can not repay them for money they loaned you. If you repay a loan or give money to a relative prior to filing a bankruptcy the trustee can undo that transaction and pursue the family member for the money you gave them. This means, the trustee may file a lawsuit against your family member to retrieve the money you gave them prior to filing bankruptcy. I see this most often around tax time when the debtor uses his tax refund to repay debts to family members or gives them a portion of the refund.
4. Do not take money out of a retirement account prior to filing bankruptcy. The Trustee is tasked with the responsibility of seizing your assets and liquidating them for the benefit of your creditors. The trustee will take cash and money sitting in your bank account. Fortunately there are exemption laws that allow you to keep very large amounts of money in you retirement plans, so the money is generally safe if it is in an IRA or 401K. However, if you take the money out of the retirement plan and put it in the bank, the trustee may be able to seize that money for the benefit of your creditors. Leave the money in the protected retirement account.
5. Do not file a bankruptcy if you are expecting an inheritance in the near future. When you file for bankruptcy all of your assets become part of the bankruptcy estate. This includes not only the assets currently in your possession, but also assets that you may become entitled to receive within the next 180 days after filing. This means if you receive an inheritance within 180 days after filing a bankruptcy the trustee can take your inherence an use it to repay your debts. This does not mean you can’t file a bankruptcy if you are going to receive an inheritance, just that if you do, you may loose the inheritance. In some cases it may still make sense to file bankruptcy and loose your inheritance especially if the bankruptcy is more valuable than the inheritance.
There are many pitfalls and traps in the bankruptcy code.
A person could lose their house, wages, tax refunds, personal injury settlements, inheritances and much more if the case is not done properly. When filing a bankruptcy you should always consult with an experienced attorney. When discussing these things with your attorney make sure you fully disclose all of your assets, liabilities and recent transactions; failure to disclose these transactions could be considered bankruptcy fraud. Bankruptcy fraud is aggressively pursued by the government and those convicted could face the loss of their discharge, huge fines and prison time.
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