Bankruptcy is a life-changing experience, but if you want it to be a positive one, it’s best to know what not to do before filing. Too many consumers attempt to skirt bankruptcy laws by trying to hide or give away assets that should be part of their filing. Bankruptcy courts don’t take kindly to that. It’s the job of a bankruptcy trustee to be sure all assets are reported and accounted for and while that may take a while, it’s really hard to hide something and get away with it. The penalties for that include dismissal of your petition for bankruptcy and could include criminal charges punishable by up to $500,000 in fines and five years of jail time. People are sometimes desperate and looking for an edge, seeking assurances they will qualify for bankruptcy. That leads to errors.
Lying about Your Assets
Chapter 7 bankruptcy includes a “means test,’’ a requirement that you disclose all of your assets and income, which determines your capacity to pay off creditors. If you purposely leave out assets or income, trying to help your qualification, your case could be dismissed. You could also be banned from filing on those debts ever again. Eventually, a bankruptcy trustee will have access to your financial records, so it’s unlikely your deception will go unnoticed. You shouldn’t try to hide any creditors, either, because credit-card companies have centralized and computerized information. They will all know you have filed for bankruptcy protection.
Not Consulting an Attorney
Bankruptcy law is too complicated for the average consumer to understand. Bankruptcy attorneys know all the subtleties, which might escape uninformed people. Example: If you have a child with a part-time job while still living with you and being claimed as a dependent their earnings must be counted toward household income.
Attorneys should know legal ways to protect assets that could be at risk. It might be tempting to save money in this do-it-yourself era, but it’s probably not worth the trouble or risk. An attorney can help you determine which bankruptcy is best for you: Chapter 7 or Chapter 13.
Giving Assets (Or Payments) To Family Members
This is a major red flag. You can’t give away your good stuff cash, property, cars, jewelry, electronics to friends or relatives with the understanding they will give it back later. It’s dishonest. Giving your car to a family member just before you file for bankruptcy is a clear-cut way to lose the car. If you own the car, it must be listed as an asset or if you still owe money, it must be listed as a liability. If you want to keep your car after filing for bankruptcy, there are strategies in place to help you do that.
Running Up Credit Card Debt
This won’t work, either. The mentality of using your available credit before filing for bankruptcy will catch up to you. After receiving the bankruptcy notification, if the creditor believes you ran up your credit-card balance before filing, it can challenge the request to eliminate some or all of what you owe him. You could end up owing money on your credit cards, even after the bankruptcy is over. Usually, any credit purchases you make within 90 days of filing for bankruptcy are not included in the bankruptcy debts. You might have to pay your credit-card debt in full and creditors could accuse you of fraudulent borrowing. To be safe, once you choose to file bankruptcy, you should stop using the credit card.
Taking on New Debt
Even more than credit-card use, it’s especially irresponsible to take on new debt, especially if you tap into a home equity line. Again, the prudent course is to suspend all debt once you know bankruptcy is the step you’re going to take.
Raiding The 401(k)
If you think it’s good business to raid your 401(k) or IRA retirement accounts to stash away some money or pay off some creditors shortly before filing for bankruptcy, think again. First, paying off some creditors (but not others) is not allowed under the bankruptcy code because you are favoring one creditor over another. More importantly, though, your retirement accounts are exempt when filing bankruptcy so it makes no sense. IRAs, Roth IRS, SEP and Simple IRAs, Keogh plans, 401(k) accounts and pension plans are exempt, so they can’t be seized by creditors or a bankruptcy trustee.
Transferring Property to Family or Friends
This is illegal and a certain way to derail your bankruptcy efforts. You are not allowed to transfer any assets for the purpose of protecting them. Look into other ways in which you can keep your house in bankruptcy.
Not Doing Your Research
Not all debt is covered by bankruptcy. Student loans, tax debt, child support and alimony payments are not dischargeable. Do your research and lean on the information offered by trained professionals if you are unsure how to file for bankruptcy or if you should file for bankruptcy.
Exempt vs. Non-exempt Property Under Chapter 7
When a person files for bankruptcy protection, they can expect to have to turn over a sizeable portion of their property to a so-called bankruptcy estate. A bankruptcy trustee manages this bankruptcy estate, selling the property to raise money to pay off a debtor’s creditors. However, a bankruptcy debtor does not necessarily have to turn over everything to the bankruptcy estate. In a Chapter 7 liquidation case, the debtor has to turn certain property over to the bankruptcy trustee. Debtors, whether they are businesses or individuals, are often justifiably concerned about what property they will be allowed to keep and what they must give up.
How Exemption Works
Bankruptcy law allows debtors to keep a certain amount of property after going through bankruptcy proceedings. This is called “exempt” property it is exempt from the bankruptcy estate. Property that cannot be exempted is, appropriately, called “non-exempt” property. Generally, a bankruptcy debtor can exempt a certain amount of his or her property during bankruptcy. If done right, this can potentially save most of the property of someone going through bankruptcy. Property that is exempt can generally be called the “necessities of modern life.” This generally includes the sort of items that are necessary for living and working. Bankruptcy law is concerned about getting debtors out of crushing debt and putting them back on their feet. Taking everything from them is counterproductive, and bankruptcy law recognizes this fact. Non-exempt property generally covers items that fall outside of the necessities for living and working.
Court rulings and general practice experience have established a general idea of what types of property are exempt and non-exempt. Below are examples of property that a Chapter 7 debtor will usually have to give up (“non-exempt” property), and property that the debtor may usually keep (“exempt” property).
Property That Is Not Exempt
Items that the debtor usually has to give up include:
• Expensive musical instruments, unless the debtor is a professional musician
• Collections of stamps, coins, and other valuable items
• Family heirlooms
• Cash, bank accounts, stocks, bonds, and other investments
• A second car or truck
• A second or vacation home
Property That Is Exempt
Exempt property (items that a debtor may usually keep) can include:
• Motor vehicles, up to a certain value
• Reasonably necessary clothing
• Reasonably necessary household goods and furnishings
• Household appliances
• Jewelry, up to a certain value
• A portion of equity in the debtor’s home
• Tools of the debtor’s trade or profession, up to a certain value.
• A portion of unpaid but earned wages
• Public benefits, including public assistance (welfare), social security, and unemployment compensation, accumulated in a bank account
• Damages awarded for personal injury
Will Filing for Bankruptcy Help Eliminate Your Debts?
It is important to understand that there are different forms of debts and, under law; there are specific types of debts that cannot be discharged through bankruptcy. These non-dischargeable debts include some tax debts, domestic support obligations such as child support and alimony, debts incurred through fraudulent acts, debts arising from criminal behavior, like drunk driving, and student loans.
Factors That Will Help You Decide When To File Bankruptcy
When to file bankruptcy is one of the most important decisions that you have to make in your financial life. Remember, when you should file for bankruptcy largely depends on your circumstances aside from the types of debt that you have incurred.
Below is a discussion of the factors to consider when filing for bankruptcy:
• Unsecured debts: If you mostly have unsecured debts, then you can file for bankruptcy. There is no minimum debt to file bankruptcy, so the amount does not matter. Examples of unsecured debts include credit card debt; cash advance (payday) loans, and medical bills.
• Secured debts: If you are behind on a house or car payment, this may be a very good time to file for bankruptcy. You will be able to keep your property and you will have 3-5 years to make up the back payments, often at a greatly reduced interest rate.
• Employment situation: Being unemployed and having trouble keeping up with your payments can make you eligible to file for bankruptcy so that you can discharge some of your unsecured debts. By doing so, you can stay current with your secured debts or catch up on those payments via a Chapter 13 bankruptcy. Likewise, if you are employed but still unable to meet your debt obligations, filing for either Chapter 7 or Chapter 13 can help you retain your assets (house and car) and free up cash to pay for them by eliminating or reducing payments on credit cards, medical bills and other unsecured debts.
• Paying for bankruptcy court costs: To qualify for a debt discharge, you will need to pay for the court costs such as the filing fee, attorney fees, and education courses. Remember that none of these fees will be wiped out after filing for bankruptcy. However, the amount of these fees is minimal in relation to the monies saved on future debt payments which continue to mount with interest and late charges.
When To File Chapter 7 and Chapter 13 Bankruptcy
Bankruptcy is a viable option for you no matter how high or low your debts are. Although the bankruptcy court does not have an outline regarding the minimum debt threshold, there are certain requirements that you need to meet in order to qualify.
• Filing history requirements: If you have filed and been discharged from a bankruptcy in the past, you may not be eligible to file for another bankruptcy discharge until a certain amount time has elapsed. The number of years depends on the type of bankruptcy you chose or the circumstances of your previous dismissal.
• Income requirements: To qualify for Chapter 7 bankruptcy, you need to pass the Chapter 7 Means Test wherein your income will be compared to the income of other families of your size within your state. This test allows the bankruptcy court to determine whether you have the capacity to pay off your debts.
• Other acceptable debt requirements: It is important to note that only certain types of debts can be discharged under this type of bankruptcy. Unsecured debts such as payday loans and credit card debts can be discharged in bankruptcy. You can also discharge the debts from a car or home that you don’t wish to keep if you are “underwater”. If you are behind on either a mortgage or car loan, then you can catch up on those payments via a Chapter 13 bankruptcy.
If you do not qualify for any of the Chapter 7 requirements, you can opt for a Chapter 13 bankruptcy, which will still allow you to discharge some or all of your unsecured debt and, at the same time, receive protection from the court and keep your assets. So, even if there is no way to discharge your non-dischargeable debts, you can pay them off with this type of bankruptcy by discharging other debt to free up cash and creating a manageable, court protected repayment plan for non-dischargeable debts.
Free Initial Consultation with Lawyer
It’s not a matter of if, it’s a matter of when. Legal problems come to everyone. Whether it’s your son who gets in a car wreck, your uncle who loses his job and needs to file for bankruptcy, your sister’s brother who’s getting divorced, or a grandparent that passes away without a will -all of us have legal issues and questions that arise. So when you have a law question, call Ascent Law for your free consultation (801) 676-5506. We want to help you!
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States
Telephone: (801) 676-5506