What Not to Do Before Bankruptcy

How to Prepare for Bankruptcy: Know What Not to Do

When you're experiencing financial stress, it's tempting to do whatever it takes to alleviate the pressure. But bankruptcy goes more smoothly when you know what to expect.

Below is a list of the "don'ts," or things not to do when you file for bankruptcy, that we cover in more detail below:

• filing at the wrong time (too soon or too late)
• withdrawing retirement funds before bankruptcy
• making luxury purchases on credit, taking cash advances, or incurring suspicious new debt before bankruptcy (11 U.S.C. § 523(a)(2))
• selling assets for less than the fair market value or gifting property (11 U.S.C. § 548)
• paying only your favorite creditors or making preferential payments to insiders (11 U.S.C. § 547)
• filing before receiving a valuable asset like an inheritance (11 U.S.C. § 541(a)(5))
• leaving debts or property off your bankruptcy paperwork (11 U.S.C. § 727(a)), and
• filing without the required tax returns.

Don't Make Bankruptcy Timing Mistakes: When to File and When to Wait

Timing matters, and filing at the wrong time can cost you.

When You'll Want to File Fast

Moving fast is usually necessary to stop foreclosure, repossession, or wage garnishment. It's also usually a good idea to file before a creditor gets a lawsuit judgment against you, because eliminating a judgment lien can be challenging, and fraud judgments are nondischargeable debts in bankruptcy.

When You Might Want to Delay Your Filing

You might choose to wait to file if there's a good chance you'll incur significant new debts. Why? Because you can't erase (discharge) debts in rapid succession. For instance, a Chapter 7 bankruptcy discharge is only available every eight years. (11 U.S.C. § 727(a)(8).)

Example. Suppose you're battling an illness and accruing medical debt, you'll likely want to delay filing until your condition stabilizes. If you file too soon and continue to accumulate debt after receiving your discharge, a creditor could continue to collect against you until you qualify for bankruptcy again, which could be years.

How to avoid the problem. Try to avoid accumulating more bills before filing for bankruptcy, and learn about the waiting periods for multiple bankruptcy filings. As a last resort, you can file for Chapter 13 without a discharge. Still, you would need to repay all of your debts over a three- to five-year repayment period, and you'd need sufficient income to qualify.

When Bankruptcy Will Need to Wait

If you move to another state before bankruptcy, you'll need to wait at least 91 days (the greater part of 180 days) before you can file for bankruptcy, and two years to use that state's bankruptcy exemptions. State bankruptcy exemptions vary, and the rule prevents filers from exemption shopping for a more favorable set. (28 U.S.C. § 1408(1); 11 U.S.C. § 522(b)(3).)

If you move into a new district within the state, you must wait 91 days to file, but your bankruptcy exemptions won't be affected.

Don't Withdraw Retirement Funds Before Bankruptcy

Nearly all tax-deferred retirement plans are protected in bankruptcy. (11 U.S.C. § 522(d)(12).) Therefore, one of the most unfortunate financial mistakes to avoid is withdrawing retirement funds before filing for bankruptcy to pay off a debt that bankruptcy could eliminate. You'll likely find yourself in a much better financial situation if you file for bankruptcy before exhausting your nest egg.

What to do instead. Before paying off bills using retirement savings, consult a bankruptcy attorney about filing for bankruptcy and other options.

Don't Commit Fraud: Luxury Purchases and Cash Advances Before Bankruptcy

Avoid making any major or unusual purchases before bankruptcy. Charges for luxury items or large cash advances made just before your case can trigger presumptive fraud. Items over $900 for a single creditor within 90 days, or cash advances exceeding $1,250 within 70 days, are presumed nondischargeable or "presumptive fraud" in bankruptcy. (Valid until March 31, 2028; 11 U.S.C. § 523(a)(2)(C).)

Unless the debt was incurred for essential living expenses, such as food, clothing, and utilities, creditors might challenge your ability to discharge the debt. If successful, you wouldn't be able to eliminate the charges unless you prove you intended to pay (and could) for the purchases.

What to do instead. Limit credit card usage to essential expenses only in the months before filing. Keep detailed records of all charges to demonstrate they were for necessities. If you anticipate needing to file for bankruptcy, avoid making any large purchases on credit.

Don't Transfer or Hide Assets Before Bankruptcy

Transferring vehicle or real estate titles, selling assets for less than they're worth, or gifting property before filing bankruptcy are huge red flags and are considered fraudulent transfers. (11 U.S.C. § 548.) Never hide property, gift assets, or sell anything for less than fair market value. The trustee can unwind these transactions, recover assets, and recommend denial of discharge—sometimes even criminal penalties. (18 U.S.C. § 152.)

What to do instead. If you need to sell assets before bankruptcy, do so at fair market value and maintain thorough documentation. Never transfer property to family members or friends to "protect" it from bankruptcy. The bankruptcy trustee can recover these fraudulent transfers, and you could face criminal prosecution.

Don't Make Preferential Payments to Creditors

Paying back loans to friends or relatives within one year of filing, or even other creditors within 90 days of filing, could be considered a "preferential transfer," and can be "undone" in bankruptcy. (11 U.S.C. § 547.)

The bankruptcy trustee might initiate an adversarial proceeding to recover the money from the individual or entity to whom you paid, subsequently distributing the funds equally among all your creditors. If you paid an ordinary creditor, this might not concern you. However, you might be affected if the trustee pursues legal action against your mother or sister to reclaim the funds.

What to do instead. Treat all creditors equally in the months leading up to filing. If you feel obligated to repay family members, wait until after your bankruptcy discharge. Consult your bankruptcy attorney about the timing of any significant payments before filing.

Don't File Before Receiving Inheritance and Windfalls

You should reconsider filing for 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.

What to do instead. If you're expecting a windfall, discuss timing with a bankruptcy attorney. In some cases, waiting a few months to file after receiving and properly exempting the asset could be the better strategy. The attorney can help you understand how different types of income and assets are treated in bankruptcy.

Don't Provide Incomplete, Inaccurate, or Misleading Information

Omitting creditors from bankruptcy paperwork, failing to list assets, or providing incomplete information can cost you your discharge. (11 U.S.C. § 727(a).) Full transparency is required. Any intentional concealment is bankruptcy fraud. (18 U.S.C. § 152.) Here's a sampling of the information about your assets, debt, income, expenses, and financial history you must provide under penalty of perjury:

• prior income
• payments made before bankruptcy
• legal actions, repossessions, and foreclosures
• gifts and contributions
• losses from theft, fire, other disasters, and gambling
• property transfers
• closed, sold, moved, or transferred financial accounts
• safe deposit boxes and storage units
• property you're holding for someone else
• property environmental issues, and
• the status of business interests.

Failing to provide the information could lead to dismissal, failure to have a debt discharged, property loss, or even criminal prosecution.

What to do instead. Be completely transparent about all assets, debts, income, and financial transactions. It's better to disclose everything and let your attorney determine how to protect your interests legally.

What Not to Do Before Filing for Bankruptcy FAQs

• How long does the bankruptcy process take?
• Will I lose everything if I file for bankruptcy?
• Can I file bankruptcy without an attorney?
• What debts can't be discharged in bankruptcy?
• How will bankruptcy affect my credit?
• Can I withdraw money before filing for bankruptcy?

How long does the bankruptcy process take?

Chapter 7 bankruptcy typically takes 3-4 months from filing to discharge. Chapter 13 bankruptcy involves a 3-5 year repayment plan before you receive your discharge.

Will I lose everything if I file for bankruptcy?

No. Most people who file Chapter 7 bankruptcy keep all or most of their property using bankruptcy exemptions. Protected items typically include your home equity (up to exemption limits), vehicle, household goods, retirement accounts, and tools needed for work.

Can I file bankruptcy without an attorney?

While you can file bankruptcy pro se (without an attorney), it's generally not advisable. Bankruptcy law is complex, and mistakes can result in losing property, having your case dismissed, or being denied a discharge. An experienced bankruptcy attorney can help you navigate the process and maximize your exemptions.

What debts can't be discharged in bankruptcy?

Certain debts survive bankruptcy, including most student loans, recent tax debts, child support, alimony, debts from fraud or intentional injury, and debts not listed in your bankruptcy papers.

How will bankruptcy affect my credit?

Chapter 7 bankruptcy remains on your credit report for 10 years, while Chapter 13 stays for 7 years. However, many people find that their credit improves faster than expected after bankruptcy because they've eliminated overwhelming debt and can begin rebuilding their credit history.

Can I withdraw money before filing for bankruptcy?

This is one of the most common questions about preparing for bankruptcy. You can't withdraw money and hide it, give it away, or use it to purchase luxury items. Otherwise, the bankruptcy answer depends on the type of bank account and how you use the money.

Protected retirement funds. You generally shouldn't withdraw money from retirement accounts before filing bankruptcy because these funds are protected from creditors. Withdrawing them converts protected assets into cash that might not be fully exempt.

Regular bank accounts. You can spend money from checking and savings accounts on legitimate living expenses before filing. In fact, it's often advisable to spend down bank account balances on necessary expenses such as groceries, utilities, medical care, and car maintenance shortly before filing. This isn't hiding assets—it's using your money for its intended purpose.

Need More Help?

Did you know Nolo has made the law accessible for over fifty years? It's true, and we wholeheartedly encourage research and learning. However, online articles and resources can't address all bankruptcy issues and aren't written with the facts of your particular case in mind. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.