When you’re experiencing financial stress, it’s tempting to do whatever it takes to alleviate the pressure. However, because you’re only entitled to receive a bankruptcy discharge—the order that wipes out your debt—every so often, it’s important to ask yourself whether you’re ready to file, or whether you might need to file sometime in the future. In this article, you’ll learn about issues you’ll want to consider before moving forward with a bankruptcy case.
Bankruptcy works well to wipe out debt. However, you’re limited in how often you can do so. You can receive a Chapter 7 discharge:
During the waiting period, you might find yourself facing an even more severe financial problem. For instance, if you’re suffering from an illness and accumulating medical debt, you’ll probably want to hold off until your illness stabilizes. Other common problems that can crop up include unemployment, an eviction, foreclosure, car repossession.
If you’d already filed a Chapter 7 bankruptcy, you wouldn’t be able to do so again. You’d be subject to a creditor garnishing your wages (taking money out of your paycheck), levying (seizing) the funds in your bank account, or taking valuable property.
Less effective Chapter 13 bankruptcy options would likely be available, but you’d have to have income to qualify, and you’d be required to pay all of your discretionary income—the amount left over after subtracting allowed living expenses—over a three- to five-year repayment period.
(For all time limitations, see Multiple Bankruptcy Filings: When Can You File Again?)
Sometimes, however, it’s in your best interest to file for bankruptcy quickly. For instance, in most cases, if you have a wage garnishment in place, the sooner you file, the more money you’ll have to pay bills.
Filing quickly is also a good idea when a creditor has filed a lawsuit against you. In such a situation, your attorney will want to look at the complaint to determine whether it includes a fraud allegation. If so, if the matter goes to judgment, you won’t be able to wipe out the debt in bankruptcy.
Also, once a creditor wins a money judgment, the lien rights that accompany it will allow the creditor to garnish your wages, attach your bank accounts, repossess your car, and foreclose on your house. But, in most cases, if you file for bankruptcy before the creditor wins the case, the bankruptcy will stop the pending lawsuit and wipe out the debt.
You should be aware that bankruptcy offers limited protection against liens, so it’s usually good to file your case before the creditor receives a judgment and liens attach to your property. Because this is a complicated area, if you’ve been served with a lawsuit, you should contact a bankruptcy lawyer as soon as possible.
(Learn more in What Happens to Liens in Chapter 7 Bankruptcy?)
You can protect most retirement funds in bankruptcy. Therefore, one of the most unfortunate financial mistakes that people regularly make before filing for bankruptcy is withdrawing retirement funds to pay off debt that bankruptcy could wipe out.
Before paying off debt in this manner, speak with a knowledgeable bankruptcy attorney. You’ll likely find yourself in a much better financial situation if you file for bankruptcy before depleting your nest egg.
On your bankruptcy paperwork, you’re required to provide under penalty of perjury complete and accurate information about all of your assets, debt, income, expenses and financial history. If you knowingly misrepresent your information, such as by failing to disclose an asset, you could be subject to criminal penalties, including fines of up to $250,000, twenty years in prison, or both.
Also, if you don’t file all of the paperwork, the bankruptcy court might dismiss your case, or you might have to file additional papers to correct the paperwork and pay more fees. And if you leave a creditor out, that debt might not get discharged. If you forget to include an asset, the Chapter 7 trustee might find it and take the property.
The Federal Bureau of Investigation (FBI) investigates bankruptcy crimes, so bankruptcy court is not the place to be less than forthright. Most bankruptcy lawyers can solve your problem for you in an appropriate manner. If you’re not sure about the potential ramification of your actions, talk to a bankruptcy attorney first.
(To learn more about bankruptcy forms and documents, see Filing for Bankruptcy.)
If you ran up debt during the 70 to 90 days before filing bankruptcy, beware (unless it was for necessities of life, such as food, clothing, and utilities). The creditor might object to your discharge by arguing that you took out the loan without any intention of paying it back (called fraud). As a general rule, if you took out cash advances or used a credit card to buy a luxury item within 70 to 90 days of filing bankruptcy, then you’ve committed “presumptive fraud” and might not get to discharge the debt.
For the most current presumptive fraudulent debt amounts, see Recent Luxury Debts and Cash Advances: Can You Get Rid of Them in Bankruptcy?
While the bankruptcy schedules ask that you provide information on assets that you own (or will own), some people might be tempted to sell, transfer for safekeeping, or hide assets before filing bankruptcy. Don’t do it. If you do, you might be denied a discharge and even be subject to criminal penalties—and it’s unlikely that the risk will be worth any perceived reward.
Of course, you might have sold property before you filed your bankruptcy case to pay your expenses, such as your rent, food, or utilities, and doing so isn’t wrong on your part. Be prepared to explain all of your transactions, and, when appropriate, provide supporting documentation.
For more information, see Hiding Assets and Property in Bankruptcy.
Bankruptcy Disclosure Requirements
Filing for bankruptcy is a transparent process. Even though you can keep (exempt) the things you’ll need to work and maintain a household, your creditors have a right to everything else). So you must agree to disclose every aspect of your financial situation in your bankruptcy paperwork before receiving the benefits of bankruptcy.
One way the court ensures that creditors get their share is by examining up to ten years’ worth of prior financial transactions. Everyone who files for bankruptcy—individuals and businesses alike—will report previous transactions on Your Statement of Financial Affairs for Individuals Filing for Bankruptcy form and include it as part of the official paperwork filed with the clerk. (Legal professionals often refer to this as the “SOFA” form.) If the court discovers that you transferred property in an attempt to avoid paying a creditor or broke another bankruptcy rule, the court will unwind the transaction and disperse the recovered funds to the creditors. Here’s a sampling of information you’ll need to include:
- the sources of your prior income
- payments you made before filing for bankruptcy
- previous and ongoing legal actions, repossessions, and foreclosures
- gifts and contributions given to others
- losses from theft, fire, other disasters, and gambling
- property transfers
- closed, sold, moved, or transferred financial accounts
- safe deposit boxes and storage units
- things that you’re holding for someone else
- any environmental issues you might know about your property, and
- the status of previous and ongoing businesses.
Once complete, you must sign a statement declaring under penalty of perjury that the information provided is accurate. Being forthright is important because any attempt to defraud the court comes with serious consequences. Specifically, the punishment for making a false statement or failing to disclose all of the property you own can be as much as 20 years in prison, a fine of up to $250,000, or both.
(For additional details about filling out this form, read How to Fill Out Bankruptcy Forms.)
If you pay back loans to friends or relatives within one year of filing, or even other creditors within 90 days of filing, 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.
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 of a loan you made to someone else. Why? Because once you receive the funds, you might not be bankrupt—especially if you could use this money to settle with creditors and get out of debt on your own. If you find yourself in this situation, consult with a bankruptcy attorney to discuss your options.
If you aren’t required to file tax returns—for instance, you receive disability insurance—you don’t need to worry about this requirement in a Chapter 7 bankruptcy. If you’re supposed to file taxes, however, but haven’t done so for the two years before filing bankruptcy, you’ll run into problems.
Your tax returns are crucial to determining your current and past earnings and asset holdings, as well as satisfying potential priority tax claims. Without your returns, completing your paperwork, and (if applicable) a Chapter 13 plan, will be next-to-impossible and will stop your bankruptcy in its tracks. For instance, there’s no way for the IRS to determine your tax obligations without a tax assessment.
If you already made one or more of these errors, you should consult with a bankruptcy attorney to discuss how to proceed.