Bankruptcy Mistakes all People Need to Avoid

Try to avoid these common mistakes for people who are not thinking about filing for bankruptcy, who are on the fence and those who were ready to file yesterday.

Liquidating your Retirement Accounts

When filing for bankruptcy, you will be required to list all of your assets and debts. With your assets, an attorney will apply the state permitted exemptions so that the things you do own can be protected as much as possible.

One of the cringiest pieces of advice I have ever heard was for someone to liquidate their retirement account to pay off loans that can be discharged in bankruptcy. The government wants you to retire. Don’t liquidate your retirement accounts, especially if you don’t have to.

The one caveat is if your retirement accounts are comparatively high compared to your debts & income. Although you can theoretically protect an unlimited amount in your ERISA account, if a trustee senses that this amount in your ERISA accounts is exceedingly more than your debts and assets, it may cause them to look a little closer at your documents to see if there are assets that have not been disclosed to them. If you honestly disclosed everything in your bankruptcy documents, this shouldn’t be a problem.

Paying back Family Members & Friends right before filing

So you think you’re doing a good thing by paying someone back - lighten the load and lower my debt so I don’t have to discharge too much, right? Unfortunately, and counterintuitively, this could get you into a lot of trouble. One of the big rules of bankruptcy is that all creditors should be treated the same. So if you pay back your Mom but you have garnishments and other debt you have not been paid, then the Bankruptcy Code looks at your payment to your mom as a preference. This means the trustee can demand for the payment to your mom back and redistribute evenly to all of your creditors. The trustee can even ask you to pay that amount back into your plan so that your unsecured creditors can have payment too. However the chapter trustee decides to handle this situation, transfers are always a red flag to them.

Racking Up your Credit Card Debt before Filing/Frivolous Spending

Once you make the decision to file for bankruptcy, it is your responsibility not to incur more debt. It is tempting, since you know it will get discharged, but in reality, that newly incurred debt may no longer be dischargeable. What’s worse is if it is determined that you did rack up more debt, whether it’s through credit cards, payday loans, etc., before filing for bankruptcy, the Trustee can pursue your for bankruptcy fraud and criminal charges and you will not be eligible to discharge any of your bankruptcy debts.

On a related topic, Trustee will have access to some of your financial information once you file and if they see that you are frivolously spending money on luxury goods or items that are not deemed necessary, they may require you to pay those amounts into your bankruptcy for the benefit of your unsecured creditors, require you to surrender the goods, or the Trustee may sell it. Some Trustees use the IRS standard of living, including your monthly car payment, as a guideline. Generally, it is their position that when a person files for bankruptcy and spends money on unnecessary luxurious items, it does not appear as if that person who filed, really has the intent to create a fresh start.

Concealing your Assets

Trustees are really picky about full disclosure, so in this topic, it also includes items one may have forgotten to include in your bankruptcy documents. Cryptocurrency, a bank account or life insurance policy not included? Be prepared to submit Trustee requested documents and, as failure to do so could potentially remove your eligibility to get a discharge on your debts or even, imprisonment.

Not Listing All of Your Creditors in your Bankruptcy Documents

You are required, by law, to include all of your creditors in your bankruptcy filing, even if you intend to pay them back later. If a creditor is not included in your bankruptcy documents, and depending on the circumstances of the bankruptcy case, the dischargeability of that debt can be challenged and is arguably, not dischargeable.

If you forgot to include a creditor on your bankruptcy docs and realized it after your filing, you can amend your documents to include them. Generally, all jurisdictions will require a filing fee for this type of action.

Moving Around Money or Assets

Some people who file may think they are savvy and try to move their assets into another person’s name before filing for bankruptcy. This is illegal and Trustees have experience sniffing out and have acquired skills to see when this happens. This includes selling real property too close to your bankruptcy case (two years). Trustees have the power to avoid the transfer and collect the property back. Also, if it is determined that these actions amounted to bankruptcy fraud, you can be sanctioned, imprisoned and not get your debts discharged.

Waiting too Long to File or Filing too Soon

Making the decision to file for bankruptcy can be a big decision, but putting off to meet with an attorney can be a really big mistake. Some people want to wait to file as a last resort, but practicing this strategy can potentially put you in a worse situation. Most bankruptcy attorneys offer a free consultation, so if you are concerned about your finances, it would be prudent to meet with a professional to give you feedback on your unique circumstance.

For example, if an unsecured creditor filed a lawsuit against you regarding a debt you owe, do not wait until the actual garnishment. You can fully avoid getting money taken from your paycheck or bank account. Once the unsecured creditor starts receiving payments and you end up filing for bankruptcy anyways, then that is technically money lost due to waiting on filing or taking the necessary steps to allow you to make the best decision for your finances.

Furthermore, if you are in the middle of completing medical treatment and have months to go, it may be prudent to wait to file for bankruptcy since only debt incurred before the filing will be discharged.

Switching Around a lot of Attorneys

A Trustee once said that they will scrutinize a bankruptcy case more closely when it comes to their attention that this is not the first attorney that is handling a Debtor’s case. Be careful about moving things around too much, it may create a red flag for trustees and attorneys when reviewing your case.

Filing under the Wrong Chapter

This is where hiring a competent bankruptcy attorney is important. Even if someone really want to file for that Chapter 7 bankruptcy case, are they even eligible? Filing for a case where you are not eligible can either get your case dismissed or converted to another chapter (requiring additional filing costs and fees). If the case gets dismissed, there are extra steps that need to be taken to ensure that the second bankruptcy case is fully protecting the debtor. Ultimately, filing for the wrong chapter can create a lot of additional work, hassle and headache when it could have been avoided.

Failing to Appear at Court Proceeding(s)

This is a big one. If you do not go to your Meeting of Creditors, you will not be eligible for your discharge and the Trustee can request for the bankruptcy case to be dismissed or seek other relief against the Debtor for their failure to cooperate.

Fortunately, the person who filed for bankruptcy only needs to attend the Meeting of Creditors and many trustees are currently holding these meetings via zoom. Your attorney will be able to represent you without your appearance for other hearings unless they are adversarial (ie. 2004 examination). Make sure to bring your state ID and social security card - not bringing these items will result in not having the proceeding held.

Trying Debt Relief Companies as a Last Attempt before Filing for Bankruptcy

I am not even saying this from a biased place. Debt consolidation companies can only negotiate with willing creditors to work a repayment plan, and have it so you can pay one monthly payment. Many times the debt repayment plans still hit your credit report, have high fees, will count the difference in your reduced debt as income on your taxes. The fees are high and if the negotiated repayment plan is defaulted, often times, the debt reverts back, where you’ll be potentially left with the original debts and more fees and costs than before signing up with the debt relief company.

Although there are a lot of “mistakes” one can make in bankruptcy, the guidance of an experienced attorney will help make the process as smooth as possible. Usually, with the amount of debt that gets discharged and/or the money that gets saved from being able to pay less on the principal balance and interest rate on eligible homes and vehicles, the amount paid to a bankruptcy attorney will most likely save you money so that you can get a proper fresh start.