Six mistakes to avoid before you file for bankruptcy

February 22, 2010

Here are six common mistakes that debtors make when they are considering filing for bankruptcy – mistakes that can lead to additional debt and even to having your bankruptcy petition dismissed.

Avoid the following mistakes to ensure that your bankruptcy petition is successful and that as much debt as possible is discharged:

1. Running up credit card bills once you’ve decided to file for bankruptcy: Some debtors mistakenly believe that they can charge as much to their credit cards as they want since their debts are going to be eliminated in bankruptcy. The fact is, however, certain debts you incur within 90 days before filing for bankruptcy are non-dischargeable – which means you’re left with the bill and you won’t get the clean slate you were hoping for.

 2. Transferring property out of your name: Often consumers mistakenly believe that they can protect assets such as their home or car by giving it to a family member before they file for bankruptcy. Under the law, a bankruptcy trustee has the authority to reverse transfers of property if those transfers were made in an attempt to hide assets from creditors. Undertaking these transfers is typically unnecessary anyway because property exemptions allow debtors to keep much of their property after filing for bankruptcy.

3. Repaying family members:Under bankruptcy law, you cannot treat one creditor more favorably than another, and that includes family members.Payments that you make to family members within one year of filing for bankruptcy may actually be reclaimed by the bankruptcy trustee and then distributed proportionately amongst your creditors.

4. Liquidating your retirement account: In general, retirement accounts are considered exempt property in bankruptcy filings. By cashing out your retirement accounts, you could lose your security for the future while still being left with considerable debts.

5. Using an equity line of credit to pay off debt: Under bankruptcy law, you typically have the ability to claim an exemption for equity in your home, which means that you retain that equity even after you go through bankruptcy. If you convert your equity into debt before filing for bankruptcy, however, you may be left with new debt that will be non-dischargeable, meaning you will still be responsible for paying it off even after your other debts have been wiped out.

6. Failing to be completely honest with your bankruptcy attorney: Unless your bankruptcy attorney has complete and accurate information about your debts and assets, they cannot properly file your bankruptcy petition. By withholding information from your bankruptcy attorney, you are taking the chance of having your bankruptcy petition dismissed as well as losing out on assets you may otherwise have been able to keep. Attempting to hide an asset can even result in criminal charges.

Remember, your bankruptcy attorney is there to help you, not judge you – there is no reason why you can’t be completely open and honest with your bankruptcy attorney throughout the entire process.

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