Certain payments and transfers that you make before filing bankruptcy cannot be undone in bankruptcy, and may even jeopardize the bankruptcy itself. Here are the most common issues to watch for:
- If you charge more than $550 in luxury goods or services on any one credit card within 90 days of filing for bankruptcy, the court can presume that you made the charges fraudulently -- that is, that you never intended to repay the credit card company. If this happens, the charges would survive your bankruptcy instead of being wiped out with your other debt.
- Likewise, if you run up cash advances totaling $825 or more on any one credit card within 70 days of filing for bankruptcy, the cash advances can be considered fraudulent and can survive your bankruptcy.
- If you pay more than $600 to a commercial creditor within 90 days of filing for bankruptcy -- or to a relative or business associate within a year of filing for bankruptcy -- the bankruptcy trustee can take the money back ("recapture" it, in bankruptcy lingo) and distribute it to your creditors.
- If you've transferred any type of property to others within the past two years, either by giving it away or selling it for less than it was worth, the bankruptcy trustee can take it back and distribute it to your creditors. (unless it fits within a property exemption). The trustee can even challenge your right to a bankruptcy discharge if it can prove that you transferred the property to try to hide if from the bankruptcy court.
By waiting until these various time periods are over, you avoid the risk that these debts might survive -- or even sabotage -- your bankruptcy filing.
If You Can't Make Your Installment Debt Payments
A surprising number of people start thinking about bankruptcy when they fall behind on their credit card payments. Some people who are unfamiliar with our legal system believe they will go to jail if they stop paying. Not true. Furthermore, most creditors, including credit card companies, banks, and medical-care providers, can't go after your wages, bank account, or home unless they first sue you in court and win.
Suing you takes time and money, and not all creditors are willing to take this step. If a creditor does sue you, you'll be personally served with a summons and complaint, after which you'll typically have 30 days to file a simple response that denies the allegations and makes the creditor prove its case at a trial months or even years down the road.
Because of the potential expense involved in bringing a lawsuit, many creditors instead will declare the debt as "uncollectable" and write it off on their taxes. If you don't own real estate and have few assets that could be seized, or you are unemployed or receiving Social Security, this is likely to happen in your case. In other words, while bankruptcy can get rid of most debts, you may be able to just stop making your payments without any consequences (except lowering your credit score), and save the bankruptcy fees. If a creditor does sue you later and win, and you have assets or income to lose, you can always file bankruptcy to get the debt wiped out.
If You Just Want to Stop Collections
Probably the most common reason people think of filing for bankruptcy is to put an end to the blizzard of telephone calls that comes your way once you stop paying on your credit card or other installment debts. While a bankruptcy filing provides a quick solution to this problem, so does a federal law called the Fair Debt Collection Practices Act (FDCPA). The FDCPA (Title 15 U.S.C. Section 1692c) and the laws of many states require creditors and collection agencies to stop calling you at your home or workplace if you ask them to. Or, as one judge of my acquaintance recently told a bankruptcy filer, "If you don't want your creditors calling you, change your number."
If You Need Help Deciding
It's not always easy to weigh the pros and cons of filing for bankruptcy against the consequences of waiting it out. Speaking to an experienced bankruptcy attorney can help you sort out your options. If you can't get a personal recommendation for a bankruptcy attorney, Nolo's Lawyer Directory provides comprehensive profiles to help you select the right attorney for you and includes many bankruptcy lawyers.
For clear-cut answers and information regarding bankruptcy, get The New Bankruptcy: Will It Work for You?, by Stephen Elias (Nolo).
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