What Not to Do Before Bankruptcy


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Bankruptcy laws are often complex in nature and some filers make mistakes before they ever file their petition at the courthouse. Making certain mistakes may have an adverse effect on bankruptcy or even prevent someone from qualifying for bankruptcy. Some mistakes to avoid include:

Continuing to Use Credit

Some people may make purchases with credit weeks or months before filing bankruptcy. They may also make payday advances. However, conducting these transactions may raise a negative implication regarding whether the filer is filing bankruptcy in good faith. In some situations, bankruptcy may even be considered fraudulent. In certain circumstances, a bankruptcy petition may be denied, such as if there was a recent payday loan. Even if the bankruptcy court does allow the filing, having recent debt can give creditors grounds to object.

Transferring Property

In order to “protect” certain assets, some filers may transfer money or other property into the name of someone else, such as a relative, spouse or child. However, this tactic can also result in a bankruptcy fraud investigation. Furthermore, transferring property out of a person’s name may cause the filer to lose the bankruptcy protection that he or she may have retained. Individuals can file for bankruptcy even if they have assets and they may even be able to keep them but this cannot happen if the filer no longer legally owns the assets.

Selectively Paying Creditors

Many individuals approach debt as a moral obligation. As such, they may feel that a debt to a friend, relative or employer is even more important and may choose to pay off these debts before filing bankruptcy. However, selectively paying creditors can spell disaster for bankruptcy filers. The bankruptcy trustee is often given the power to sue the individual that was paid back in order to recuperate these funds for the bankruptcy estate.

Altering Other Financial Transactions

Just as a person should continue to pay debts as he or she normally would and not take any special action, he or she should not take any special action regarding deposits. This includes refraining from making deposits of funds that do not actually belong to the filer or conducting business transactions through a personal account.

Not Filing Income Tax Returns

A filer’s tax returns are critical as a source of information to complete the necessary filings with the court. They help show the filer’s current earnings and show ownership of certain assets that the bankruptcy lawyer may try to protect. Not having tax returns may result in a dismissal of the bankruptcy case.

Making a Legal Claim

Even if a filer has a legitimate legal claim against another person or entity, this claim becomes the asset of the bankruptcy estate once the bankruptcy petition is filed.

Receiving Future Payments

The bankruptcy estate also has an ownership interest in funds that are not yet in the filer’s possession but are anticipated. If a filer takes action to receive future payments like accepting a bonus from work, accepting an inheritance that will be paid in the future or filing a tax return for a refund, the bankruptcy trustee can use these funds to pay creditors.

Ignoring Collection Actions

Another critical error is allowing a home to get foreclosed or property repossessed. Once a creditor receives a judgment, it can take action to collect a debt owed, such as garnishing wages or a bank account. A bankruptcy lawyer can explain the automatic stay in a bankruptcy action that can protect a debtor from any additional collection actions by creditors.

Providing Inaccurate Information

The debtor is required to submit important financial information and filings with the court. These documents are typically submitted as sworn testimony with the threat of penalty of perjury. If a filer knowingly misrepresents information, he or she may be subject to criminal prosecution.

Not Hiring a Lawyer

Bankruptcy is a complex area of the law, which is why some lawyers focus their entire practice on this particular aspect of the law. A bankruptcy lawyer is familiar with the documents that must be submitted to the court and can help complete this information. He or she can also provide advice throughout the process so that the debtor stays informed of his or her rights and avoids making costly mistakes.

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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.

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