If you intend to file bankruptcy, there is a great deal of preparation that goes beyond just filling out the grueling paperwork. What you do, or don't do, prior to bankruptcy can have an affect on your bankruptcy's success. Some actions or financial transactions can have a severe, irreversible impact on your bankruptcy filing.
Here are some of the more common mistakes to avoid.
On your bankruptcy paperwork, and at your 341 Meeting of Creditors, you are required to provide complete and accurate information about all of your assets, debts, income, expenses and financial history. You do so under penalty of perjury. If you knowingly misrepresent your information, such as fail to disclose an asset, you could be subject to criminal prosecution.
You cannot be too casual about your paperwork, either. You have to make sure to include all of the information requested and not leave boxes or lines blank unless the question really does not apply to you. Leave anything out, and it could come back to haunt you later on in the bankruptcy. You may have to file additional papers to correct the paperwork and pay more fees. Leave a creditor out, and that debt might not be discharged. If you forget to include an asset and it is discovered later, your Chapter 7 trustee may take that property. If you do not file all of the paperwork and forget to include schedules or forms, the bankruptcy court may dismiss your case or deny you a discharge.
(To learn more about what is required in the way of bankruptcy forms and documents, see Filing for Bankruptcy.)
If you have not filed all of your income tax returns for at least the two years prior to filing bankruptcy, it not only makes completing your petition, schedules, statement of financial affairs, and (if applicable) Chapter 13 plan next-to-impossible, it also stops your bankruptcy in its tracks. This is because your tax returns are crucial to determining your current and past earnings and asset holdings, as well as satisfying potential priority tax claims. After all, there is no way to determine your tax obligations until a tax assessment has been made. The IRS cannot make a proper assessment without your tax returns.
Missing tax returns will likely result in dismissal of your bankruptcy case and/or objections to your Chapter 13 plan. You will not be able to move forward with your bankruptcy unless and until your tax returns are filed.
If you ran up more debt in the 70 to 90 days prior to filing bankruptcy, then that creditor may try to object to your discharge. It may argue that you took out the loan without any intention of paying it back (this is called “fraud”), and that you should not be allowed to discharge that debt in bankruptcy.
As a general rule, if you took out cash advances of up to $875 within 70 days before filing bankruptcy, then you may be denied a discharge on that debt. If, however, the cash advance was in the form of a payday loan where you were on a cycle of payday advances and repayment, then you may have some relief. See, Pay Day Loans in Bankruptcy.
If you used a credit card to buy a luxury item within 90 days of filing bankruptcy, in an amount exceeding $600, than you may similarly be denied a discharge of that debt. Again, the creditor may file an objection to discharge of that debt, claiming you had no intention to repay it.
For more information, see Recent Purchases and Cash Advances in Bankruptcy.
Similarly, do not cash out or take loans against your 401(k), pension or other retirement payment plan. Avoid taking out an equity line of credit against your house. If you do, this may become an issue in your bankruptcy. For example, you may be able to protect the equity on your home with a real estate exemption rather than deplete it for the sake of an unsecured creditor who could have been discharged.
While the bankruptcy schedules ask that you provide information on assets that you own (or will own) at the time of filing bankruptcy, do not be tempted to sell, transfer for safekeeping, or hide assets before filing bankruptcy. If you do, you might be denied a discharge and even be subject to criminal penalties.
Of course, you may have sold property in an effort to pay off your debts on your own. That is not necessary criminal or even wrong on your part. Do understand, though, that on your statement of financial affairs and at the trustee examination at your 341 meeting of creditors, the trustee will asked if you sold, transferred or gave away any assets, usually for a period of one year or more before filing bankruptcy. The trustee will also ask what you did with the money. If you paid a creditor shortly before filing, then the trustee may seek to get that money back as a preferential transfer (see below).
For more information, see Hiding Assets and Property in Bankruptcy.
If you pay back loans to friends or relatives (within one year of filing), or even other creditors (within 90 days), then this may be considered a “preferential transfer.” A preferential transfer can be “undone” in bankruptcy. The bankruptcy trustee may file an adversarial proceeding to get the money back from the person or entity you paid, and then disburse the money in equal shares amongst all of your creditors. If you paid an ordinary creditor, then that might not matter to you. You might care, however, if the trustee sues your mom or sister to get the money back.
For more information, see Adversary Proceedings in Bankruptcy: Preferential Transfers.
If intend to file bankruptcy, your creditors likely don't know that. If a creditor has obtained a judgment against you, it may be in the process of garnishing your wages, attaching your bank accounts, repossessing your car, or foreclosing on your house.
Do not ignore these creditors, even when you are filing an emergency bankruptcy petition. Advise them right away of your intention to file bankruptcy. If you have an attorney, be sure to provide the information your attorney needs to stop any attempts to take your property, including copies of any garnishment notices. While in most cases a creditor would have to return property it inadvertently seized after a bankruptcy was filed, it can create a costly legal headache, which you should avoid if at all possible.
You have a duty to avoid hiding assets in bankruptcy. However, you should reconsider filing bankruptcy if you are about to receive an inheritance (within one year), a significant income tax refund, a settlement from a lawsuit, or repayment from a loan you made to someone else. You could use this money to settle with creditors and get out of debt on your own. The timing may not be right, or you may need to adjust your available exemptions. Either way, you should consult with a bankruptcy attorney to discuss your options.
If you already made one or more of these mistakes, you should consult with a bankruptcy attorney to discuss what to do. Depending on the circumstances, you may:
delay filing Chapter 7 bankruptcy
file or convert to Chapter 13 bankruptcy to resolve a potentially non-dischargeable debt or asset issue
file Chapter 7 bankruptcy anyway, explain your situation honestly and let the chips fall where they may, or
For more articles on what to do, or not do, before bankruptcy, see our articles in the Prebankruptcy Planning topic area.