Top Ten Bankruptcy Mistakes

Below are ten bankruptcy mistakes, in no particular order.

1. Waiting Too Long. No one wants to file bankruptcy, and it is human nature to put off unpleasant events like bankruptcy.  Most people feel terrible about filing bankruptcy so they postpone bankruptcy as long as possible.  Waiting too long to file gives your creditors the opportunity to seize your assets by garnishment and levy. Also, people who postpone bankruptcy often deplete protected assets such as their retirement funds and are left with no savings after filing.  Wage garnishment, foreclosure, and repossession can all be stopped by filing bankruptcy before creditors begin these collection actions.  The purpose of bankruptcy is to help you recover from financial difficulty, and waiting too long to file makes recovery more difficult.

2. Getting a Second Mortgage Instead of Filing Bankruptcy. Many clients try to put off inevitable bankruptcy by obtaining a second mortgage to pay off their unsecured debts.  If you cannot make your first and second mortgage payments, you can lose your home.   It is not wise to risk your home for the benefit of unsecured creditors.

3. Depleting IRA and 401k Plans to Pay Creditors. Your IRA and 401K plans, as well as other tax qualified plans, are exempt assets.  You can file bankruptcy and still keep all of your qualified retirement savings to help reestablish your normal lifestyle after bankruptcy and to provide a safety net for your retirement.  Do not sacrifice your retirement security to pay your unsecured creditors.  Eventually, you may still have to file bankruptcy, and in that case, there is no benefit to having depleted retirement funds in an effort to postpone filing.

4. When You Have a Substantial Tax Refund Pending. The exemption for income tax refunds is limited, and an ill-timed bankruptcy filing may jeopardize your tax refund.  You should discuss any expected refunds with your attorney before filing.

5. Reaffirming Burdensome Debt. Reaffirming (keeping) loans through bankruptcy will make it difficult or impossible for you to recover financially.  Don’t keep credit cards with significant balances.  Banks will send you new credit cards after your bankruptcy is discharged.

6. Failing to List All Creditors. A creditor you forgot to list on your bankruptcy petition may not be discharged.  You should list all creditors, even potential creditors and those you intend to repay. You must also include debts owed to family members and insiders.

7. Large Credit Usage Shortly Before Filing Bankruptcy. You must tell your attorney if you have taken significant cash advances, made balance transfers, or made other large purchases within the previous three months.  Do not use a credit card after you first consult with a bankruptcy attorney or have made the decision to file bankruptcy.

8. Paying Back Loans to Family Members Before Filing Bankruptcy. People generally do not want to file bankruptcy against their family members or business partners so they sometimes repay these loans before contacting a bankruptcy attorney.  Repayment of family loans are called “preferences” because you are giving your family members preference over your non‑family creditors. The bankruptcy Code does not allow preference payments.  The Trustee can sue your family members to recover sums paid to them within the past year.

9. Transferring Non-Exempt Assets to Others. Assets transferred in anticipation of filing bankruptcy may be recovered by the trustee as a fraudulent conveyance.  Giving away money or other assets to your children, parents, or siblings will not protect the assets from the bankruptcy trustee, and such transfers may jeopardize your bankruptcy discharge.  In addition, the trustee may sue your family members to reverse such transfers.

10. Ignoring Letters from the Court and Your Attorney.  Any notice or letter you receive either from the bankruptcy court or your attorney is important.  Failure to respond to a communication may have adverse consequences.  There is probably a good reason why your attorney is trying to contact you or is asking for information and documents.

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