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Bankruptcy Mistakes (do not do these!)

Bankruptcy Mistakes

Bankruptcy Mistake 1:  Don’t run up your credit cards.

Big bankruptcy mistake!  Incurring credit debt shortly before filing a bankruptcy is the wrong thing to do. Although the bankruptcy Code provides that credit incurred in excess of $1,225.00 within 60 days prior to filing bankruptcy can result in the debt not being discharged, meaning you will have to pay it, creditors will look back further than 60 days. One sure way to have a problem with a creditor is to charge a lot of money on credit cards before you file. Once you make the decision to file a bankruptcy, you should stop using your credit cards altogether.

Bankruptcy Mistake 2: Don’t get a 401 K or other retirement plan alone to pay off any debt.

Big Bankruptcy Mistake.  Your Retirement should be left untouched, if possible. Retirement funds are almost always exempt in a bankruptcy, meaning that you don’t lose these funds. Borrowing money from your retirement is a very expensive thing to do. If you don’t pay these borrowed funds back you’ll be taxed on the money borrowed and also have to pay a penalty. I see too many people borrow money from their retirement plans to pay off credit card debts only to find the credit card debt right back up there where it was before. And now they have a large retirement plan loan on top of it. Before you borrow any kind of money to pay off debt, you should discuss this matter with an attorney.

Bankruptcy Mistake 3: Don’t get a second, or third, mortgage on your home. This includes equity lines of credit.

Big Bankruptcy Mistake! Many people have totally unsecured debt, like medical bills, credit card debt and signature loans, that would all be discharged in a bankruptcy, and end up having to pay it back unnecessarily because they borrow against their home to pay this kind of debt. Getting these kinds of loans to pay off unsecured debt turns a debt you can discharge in a bankruptcy into a debt that you have to pay if you want to keep your house.
Many people don’t understand that an equity line of credit is actually another mortgage on their home. Even worse, I have seen some credit cards that are actually equity lines of credit in disguise. Your home is the biggest single investment that you will probably ever have. Credit cards, medical bills and signature loans can be discharged in bankruptcy. If you use the equity in your home to pay off credit cards or other debt, you may be making a serious mistake.

Bankruptcy Mistake 4: Don’t wait too long to file.

Most people I see wait from 6 to 12 months before coming in to see me to learn about their options in bankruptcy. In most cases, this is 6 to 12 months too long. Ask yourself this question if you’re thinking about your options in bankruptcy, “Where will I be in six months if I don’t wipe out all my debt in bankruptcy? Where will I be in one year, or two years?” If your answer is not that you will be significantly closer to being debt free than you are right now then you should seriously consider filing a bankruptcy. By waiting too long to file you are wasting precious time and money. You’re probably going to be much better off filing a bankruptcy now and getting started right away to reestablish your credit rather than trying to do the impossible by attempting to pay your way out of a hopeless debt situation.

Bankruptcy Mistake 5: Don’t have more taken out of your paycheck for tax purposes then you need to.

There are some folks that use the income tax withholding as an unconventional savings plan. They have more taken out of their paycheck every week said than they should so that they can get a very large refund at the end of the year. When these folks file for bankruptcy, they sometimes lose their tax refund to the trustee who distributes it to the creditors. Furthermore, by having more taken out of your paycheck every week, you are shorting yourself and your family money that you would be able to be use for living expenses.

Bankruptcy Mistake 6: Don’t pay relatives back if you owe them.

There are certain periods of time before the bankruptcy filing, called a “look back period,” that trustee in bankruptcy will look at in order to determine whether or not a payment to a creditor has been made that is “preferential,” and can be reversed. Normally, if you’ve not paid more than $600 to any single creditor in the 90 days prior to filing, there will be not be any preference. However, the “look back” period for “insiders,” most frequently family members, is two years! The reason for this is easy to see. If funds are scarce and not all creditors can be paid, it would make sense to think that you would probably pay back a debt owed to a family member before another creditor. For this reason, Congress has written the bankruptcy law to “un-do” that kind of preferential payment. So, if you borrowed money from a family member, it is unwise to pay them back prior to filing bankruptcy. You’re much better off simply owing them the money. If you have done this, there is a solution. The chapter 13 bankruptcy can be arranged to avoid the potential that the family member will have to give up the money you paid to them. It is absolutely imperative that you’re clear about this before filing a Chapter 7 because of the potential lawsuit that could be filed against your relatives in the event that an insider payment was made in the two-year period prior to filing bankruptcy. You should discuss this issue with your attorney prior to filing.

Bankruptcy Mistake 7: Don’t transfer assets out of your name.

Like the preferential payments discussed above, the bankruptcy petition requires you to list any transfer of property out of your name in the one-year period prior to filing a bankruptcy. This does not mean that you cannot file bankruptcy for one year after transferring property out of your name. For example, if you sold a used car to someone for a $1,000 and the car was worth about $1,000 then there would be no problem in your bankruptcy. However, if you sold your 1999 Harley-Davidson motorcycle to your friend for $10 in the one year prior to filing a bankruptcy then the trustee would consider the transaction to be a sham (a fake transaction) designed to get the motorcycle out of your name so that you would not lose it in a bankruptcy. The trustee would then require the motorcycle to be put back in your name (or the name of the trustee) and sell it to pay your creditors. There are many more considerations other than the ones mentioned here that must be looked at to determine whether or not a pre-bankruptcy transfer is going to be a problem for you. Any transfer should be discussed thoroughly with your bankruptcy attorney. Some look back periods are as long as four years.

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