Three Bad Bankruptcy Mistakes Before Filing Bankruptcy

December 9, 2011

The bankruptcy laws are confusing and complicated. Fortunately Congress and the US Supreme Court have given us a guidepost by stating that the bankruptcy laws exist to help debtors who are poor and honest. The bankruptcy trustee will investigate your case to determine whether you are both poor and honest. Excess money or equity in property can be taken to pay creditors, and efforts to hide money or assets will be punished. With this in mind, here are three bad mistakes you can make before filing bankruptcy:

Mistake #1: Cashing Retirement Funds
Most retirement funds are fully protected from creditors and the bankruptcy court. That means if you file bankruptcy, you keep your retirement money. Congress wants you to have money for your retirement.
Along with the obvious problems associated with losing your future retirement money, cashing out retirement funds is also huge mistake because (1) your attorney may no longer be able to protect available retirement money converted into cash; and (2) in some cases the money you pay on a loan may be recoverable by the bankruptcy trustee. Money paid to creditors before bankruptcy does not improve your financial situation or help you recover from bankruptcy. Always discuss cashing out 401(k) or IRA retirement funds with your attorney prior to your filing bankruptcy.

Mistake #2: Transferring Property for Less Than Full Value
Anytime an individual transfers property for less than full value, the transfer seems “suspicious.” This is especially true when the transfer occurs just before a bankruptcy filing. The bankruptcy trustee scrutinizes all property transfers before bankruptcy, and if a property transfer was not a fair and honest exchange, the trustee may avoid the transfer and get the property back.
One common bankruptcy mistake is transferring property to a friend or family member in an effort to hide it from the bankruptcy court. This is a very bad mistake that can result in: (1) losing the property anyway; (2) denial of your bankruptcy discharge; and/or (3) criminal prosecution for bankruptcy fraud. If you need to sell or transfer property before your bankruptcy, contact an experienced attorney and discuss your options!

Mistake #3: Paying Off Loans
When a debtor pays off a loan before bankruptcy, the trustee becomes very interested in your case. First, if you paid a large sum of money to one creditor just before filing, the trustee may ask the creditor to return the money.  Second, paying off an unsecured creditor that is otherwise dischargeable (like a credit card or payday loan) is like throwing your money away. You need that money to help rebuild your finances.
Finally, paying off secured property could create too much non-exemptible equity. The bankruptcy laws allow you to keep property up to a certain amount. The protected amount is determined by taking the fair market value of the property minus any secured loans. When you pay off the loans, you increase your equity in the property which may exceed the amount you are allowed to keep. When that happens the bankruptcy trustee may ask you for the property or the cash difference between the equity and the exemption amount. Bottom line: don’t pay off loans before bankruptcy!

If you are struggling financially, avoid these common bankruptcy mistakes by discussing your situation with an experienced bankruptcy attorney. Your attorney can guide you through the bankruptcy process and help you emerge on the other side with a brighter financial future.

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