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 In Bankruptcy?
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 Bankruptcy?
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. 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.
Don’t Rush Into Bankruptcy Too Quickly
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:
• once every eight years, or
• six years after a Chapter 13 bankruptcy filing.
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 already filed a Chapter 7 bankruptcy, you wouldn’t be able to do so again. A creditor could garnish your wages (take money out of your paycheck), levy (seize) the funds in your bank account, or take 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. 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 a lawsuit against you. 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 probably 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. You can also 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 bills 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.
Don’t Provide Inaccurate, Incomplete or Dishonest Information
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. If you leave a creditor out, that debt might not get discharged. And, 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 in an appropriate manner. If you’re not sure about the potential ramification of your actions, talk to a bankruptcy attorney first. If perhaps 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.
Don’t Move Assets
While the bankruptcy schedules ask that you provide information about assets 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.
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.
Don’t Selectively Repay Loans
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.
Don’t File When You are About to Receive Substantial Assets
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.
Don’t Fail to File Income Tax Returns
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’re considering filing for bankruptcy, you won’t want to make innocent or accidental errors that could hurt your bankruptcy case. Avoiding these common mistakes can preempt creditor and trustee challenges and help ensure that your bankruptcy case moves through the process smoothly:
• transferring money or property
• paying favorite creditors and not others
• buying unnecessary items on credit
• making unusual bank deposits, and
• initiating unnecessary lawsuits.
Because you’ll want to avoid mistakes after filing your Chapter 7 case too, you’ll also find tips for successfully navigating the bankruptcy process. The bankruptcy court will examine past transactions made within a specified period before you file. The “look back” period is usually one to two years but can be up to ten years. Many mistakes can be avoided simply by delaying the filing of your bankruptcy until these periods have expired. But that’s not always the case, so it’s important to talk with a bankruptcy lawyer to avoid potential allegations of bankruptcy fraud. Many consumers think that transferring their assets to their mothers’ bank accounts, or putting them in their wives names, will protect them. But moving assets out of your name won’t protect them from the reach of the bankruptcy court.
Worse, such transfers could lead a bankruptcy court to find that you have committed bankruptcy fraud even if you transferred the property innocently, without any intention to conceal assets. A few examples of transfers that might get you in trouble include:
• changing title to a child’s or spouse’s car which is in your name, into the name of your child or spouse
• changing the name on bank accounts, or eliminating your name from accounts which are held jointly with others
• taking your name off of a business venture
• depositing funds or moving funds into bank accounts belonging to others, and
• deeding real property in your name to another person, even if it’s a legitimate transaction in which you paid the fair market value.
Many consumers move property or funds out of their name for fear of losing them in bankruptcy. However, having assets does not mean that you cannot file a bankruptcy or will necessarily lose them. An attorney will be able to tell you the best way to deal with assets that you fear may be exposed when you file for bankruptcy, including how to protect property using bankruptcy exemptions.
Avoid Favoring Creditors Before a Bankruptcy Filing
Many consumers want to “do the right thing” and pay certain creditors in full before filing for bankruptcy. For example, they might want to make sure mom’s loan gets paid or that the friendly people at Discover get paid in full. These transactions are prohibited. You certainly can pay your bills as you would in the ordinary course. If you incur $100 on American Express this month, you can pay it off next month. However, you cannot make an out of the ordinary payment to your favorite creditor while not paying others. These payments are called preferential transfers and may trigger a “clawback” lawsuit. The bankruptcy court trustee responsible for administering the case sues the entity or person to get the money back in bankruptcy clawbacks of preferential and fraudulent transfers.
Avoid Making Credit Card Purchases Before a Chapter 7 Filing
Unless you need to incur extra credit card debt for the necessities of life, such as gas, housing, or food, you should stop using your credit cards altogether. If you buy luxury purchases on credit shortly before bankruptcy, you risk a creditor objection to the debt’s discharge. You can continue to use debit cards. Find out when to stop paying your credit cards.
Avoid Depositing Unusual Amounts Before Filing Bankruptcy
You won’t want to deposit any money which is not considered salary or payment to you into your bank account. Examples would be depositing money in your account as a favor to others, or which is not your money. Consumers with small businesses should refrain from conducting transactions for the company using personal accounts. You’ll likely have a difficult time proving that the funds weren’t yours, and it might cause a problem with your ability to pass the means test and qualify for Chapter 7 bankruptcy. Learn more about bank accounts in bankruptcy.
Be Wary of Suing People Before Filing Chapter 7
Any legal claim you have is an asset in your bankruptcy case, even if the matter is unresolved or if the amount you’re entitled to hasn’t yet been determined. Even claims that you have against others you haven’t acted on are property of the bankruptcy estate. If you have a pending legal claim (whether it’s a lawsuit or not), talk to a lawyer before filing for bankruptcy.
Avoid Filing Bankruptcy If You’ll Receive Future Payments
Funds that are not actually in your possession but which you expect to get in the future are part of your bankruptcy estate. If you are filing for Chapter 7 bankruptcy, the Chapter 7 trustee can take this money and use it to repay your unsecured creditors. Examples include agreeing to accept a future bonus at work, getting an inheritance you’ll receive in the future, or filing tax returns that entitle you to a refund. If you anticipate receiving any payments or money in the future, talk to a bankruptcy attorney. Making mistakes during the bankruptcy filing process can complicate your bankruptcy case, especially if you’re a self-represented debtor.
Avoid Filing Under the Wrong Bankruptcy Chapter
Most individual debtors file for either Chapter 7 or Chapter 13 bankruptcy. But each type of bankruptcy has benefits and drawbacks. The type you file will depend on your financial circumstances. Learn whether you should file for Chapter 7 or Chapter 13 bankruptcy before filing your case.
Avoid Failing to Complete Bankruptcy Education Requirements
If you want to file for bankruptcy and receive a discharge, you must complete credit counseling and debtor education requirements.
• Credit counseling. Before you can file for bankruptcy, you are required to receive credit counseling from an approved agency. When you file your case, you will need to submit your certificate of completion to the court. If you don’t obtain credit counseling before filing your bankruptcy, the court will typically dismiss your case.
• Debtor education. After you file your case, you must also complete a personal financial management course (also called a debtor education course). If you don’t satisfy the debtor education requirement, the court will not issue a discharge in your bankruptcy.
Avoid Filing the Wrong Bankruptcy Forms
When you file for bankruptcy, you must complete a packet of forms that includes your petition, schedules, statement of financial affairs, and other required documents. If you don’t have an attorney, it’s your responsibility to know which forms to file and how to complete them. You can obtain the official bankruptcy forms from the bankruptcy form page of the United States Courts website. Your bankruptcy court may also require you to fill out additional local forms. Find an overview of the bankruptcy forms with links to downloadable versions.
Avoid Failing to Follow Bankruptcy Rules and Procedures
Each bankruptcy court has its own set of local bankruptcy rules and procedures each debtor must follow. Also, after you file your case, you must provide your bankruptcy trustee with certain supporting documents (such as pay stubs and tax returns). Your bankruptcy trustee might also have additional requirements or guidelines to satisfy. If you don’t follow all of the local rules in your area, it can cause delays or even lead to your case’s dismissal. In most cases, you can find your bankruptcy court’s local rules by going to its website. To find your local court, go to the Federal Court Finder.
Avoid Using the Wrong Bankruptcy Exemptions
Bankruptcy exemptions allow you to keep a certain amount of property in Chapter 7 bankruptcy and reduce the amount you pay to unsecured creditors in Chapter 13. But you must conduct a fair amount of research to learn about:
• which exemption system you can use, and
• the type of property you can exempt.
Exemptions are significant because they can make the difference between keeping or losing an asset in bankruptcy. For this reason, make sure to research your state’s exemption laws carefully before filing your case.
Avoid Failing to Attend the Meeting of Creditors
Typically 20 to 40 days after you submit your bankruptcy case, you must attend a required hearing called the 341 meeting of creditors. At the 341 hearing, the bankruptcy trustee (and any creditors who choose to participate) can ask you questions under oath about your bankruptcy and financial affairs. The court will mail you a notice containing the date, time, and location of your meeting of creditors. If you don’t go, the court will usually dismiss your bankruptcy. Even if you want to file on your own, talking to a bankruptcy attorney before filing your case can help you discover hidden dangers and avoid mistakes. Many bankruptcy attorneys offer free consultations and can provide you with valuable information about the bankruptcy process. For this reason, it’s generally a good idea to consult a bankruptcy attorney before filing your case.
Bankruptcy works well to wipe out debt; however, you’re only entitled to receive a bankruptcy discharge the order that wipes out your debt every so often. So it’s a good idea to examine whether now the time is or whether you might need to file sometime in the future. Specifically, you can receive a Chapter 7 discharge:
• once every eight years, or
• six years after a Chapter 13 bankruptcy filing.
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 condition stabilizes. Also, be aware of other common problems that can crop up, including unemployment, eviction, foreclosure, and car repossession. If you already filed a Chapter 7 bankruptcy, you wouldn’t be able to do so again. A creditor could garnish your wages (take money out of your paycheck), levy (seize) the funds in your bank account, or take valuable property. Less effective Chapter 13 bankruptcy options would likely be available.
Depending on how long it had been since you filed Chapter 7, you might not be entitled to another discharge. And, not only would you’d have to have sufficient income to qualify, but 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.
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. You’ll also want to file quickly when a creditor has a lawsuit against you. Your attorney will examine the complaint to determine whether it includes a fraud allegation. If so, the best bet will likely be filing for bankruptcy before the case goes to judgment. If the matter goes to judgment, you probably 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. 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.
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. Suppose you knowingly misrepresent your information, such as by failing to disclose an asset. In that case, you could be subject to criminal penalties, including fines of up to $250,000, twenty years in prison, or both.
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. If you leave a creditor out, that debt might not get discharged. And, 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 find an appropriate solution to your problem. If you’re not sure about your actions’ potential ramifications, talk to a bankruptcy attorney first. While the bankruptcy schedules ask that you provide information about assets 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. Filing for bankruptcy is a major undertaking. It requires an evaluation of all a person’s finances, property, and assets. It also involves following a strict legal process and having a thorough understanding of the applicable laws. Therefore, if you intend to file for bankruptcy, it is strongly recommended that you hire a local bankruptcy lawyer for further guidance. An experienced bankruptcy lawyer will already be familiar with the filing process and relevant laws. Your lawyer can help you assess your options, explain the potential benefits or risks, and assist you in preparing and filing all necessary paperwork. Your lawyer will also know what type of bankruptcy you should file for and can represent you at any bankruptcy proceedings.
When you’re experiencing financial stress, it’s tempting to do whatever it takes to alleviate the pressure. But most people find that a bankruptcy case goes more smoothly with a bit of planning. Bankruptcy works well to wipe out debt; however, you’re only entitled to receive a bankruptcy discharge the order that wipes out your debt every so often. So it’s a good idea to examine whether now the time is or whether you might need to file sometime in the future. Specifically, you can receive a Chapter 7 discharge:
• once every eight years, or
• six years after a Chapter 13 bankruptcy filing.
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 condition stabilizes. Also, be aware of other common problems that can crop up, including unemployment, eviction, foreclosure, and car repossession. If you already filed a Chapter 7 bankruptcy, you wouldn’t be able to do so again. A creditor could garnish your wages (take money out of your paycheck), levy (seize) the funds in your bank account, or take valuable property. Less effective Chapter 13 bankruptcy options would likely be available. Depending on how long it had been since you filed Chapter 7, you might not be entitled to another discharge. And, not only would you’d have to have sufficient income to qualify, but 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. 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. You’ll also want to file quickly when a creditor has a lawsuit against you. Your attorney will examine the complaint to determine whether it includes a fraud allegation. If so, the best bet will likely be filing for bankruptcy before the case goes to judgment. If the matter goes to judgment, you probably 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. 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. 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 a debt that bankruptcy could wipe out.
Before paying off bills 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.
Suppose you knowingly misrepresent your information, such as by failing to disclose an asset. In that case, you could be subject to criminal penalties, including fines of up to $250,000, twenty years in prison, or both. 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. If you leave a creditor out, that debt might not get discharged. And, 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 find an appropriate solution to your problem. If you’re not sure about your actions’ potential ramifications, talk to a bankruptcy attorney first. If you ran up debt during the 70 to 90 days before filing bankruptcy, beware (unless it was for life necessities, 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. While the bankruptcy schedules ask that you provide information about assets 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.
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. The court ensures that creditors get their share 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.) Suppose the court discovers that you transferred property in an attempt to avoid paying a creditor or broke another bankruptcy rule. In that case, the court will unwind the transaction and disperse the recovered funds to the creditors.
Here’s a sampling of the information you’d 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 essential because any attempt to defraud the court comes with severe consequences. The punishment for making false statements or failing to disclose property can be up to 20 years in prison, a fine of $250,000, or both. 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 funds in equal shares amongst all of your creditors. If you paid an ordinary creditor, then that might not matter to you. However, you might care if the trustee sues your mom or sister to get the money back.
Don’t File When You are About to Receive Substantial Assets
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.
Don’t Fail to File Income Tax Returns
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. However, if you’re supposed to file taxes 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.
Reasons to File for Bankruptcy
There are some circumstances in which filing for bankruptcy may be your best (or only) recourse:
• You’ve already tried to negotiate. Suppose that you have attempted to negotiate a repayment plan with one or more major creditors, as experts often recommend as a first step, but they have not budged. They want their full payment and aren’t willing to be paid out over time and you don’t have the means to make that payment. This can leave you with few options other than to file for bankruptcy.
• Your liabilities far exceed your income and assets. Another major reason some individuals file for bankruptcy is that they simply cannot pay their debts, and just servicing the debt that is, making the required monthly payments exceeds the monthly income they generate. For example, consider someone who owes $500,000 to a bank and whose monthly mortgage payment is $4,000. If this person only has income of $2,000 a month, and another $25,000 in assets to draw on, they may have few other options than to file for bankruptcy. Otherwise, they will deplete their assets in about a year and be completely unable to make that $4,000 payment going forward.
Negative Impacts of Bankruptcy
Filing for bankruptcy is sometimes the right decision, but it is not without consequences. Those include:
• Your credit will be shot. Anyone considering bankruptcy needs to keep in mind that their credit reports and credit score will take a major hit one that can last for years. In the case of Chapter 7, bankruptcy will remain on your credit reports for up to 10 years; for Chapter 13, it’s seven years. That can make it impossible to get a loan or a regular credit card, except at exorbitant rates. Having a bankruptcy on your credit report can also mean higher insurance premiums and even affect your ability to get a job or rent an apartment.
• You may lose your property. In a Chapter 7 bankruptcy, often referred to as liquidation, a court-appointed trustee will dispose of many of your assets in order to pay your creditors. Those assets include real estate (other than your primary residence), a second car or truck, boats, valuable collections, bank accounts, and non-retirement investments. You are allowed to keep what’s referred to as exempt property, such as a portion of the equity in your home and car, personal items, clothing, any tools needed for your work, and retirement accounts. In a Chapter 13 bankruptcy, you are allowed to keep your assets, as long as you adhere to a three- to five-year plan to repay your creditors.
• There could be a psychological impact, too. Besides its dollars and cents impact, bankruptcy carries a stigma in our society. While some people may be unaffected by that, others can come to feel that they’re losers, failures, or have no hope of ever turning their finances around. Or they may worry that their neighbors and loved ones will feel that way. In short, it’s worth considering how bankruptcy might affect your mental health and your relationships with those around you.
How Much Does Bankruptcy Cost?
Another consideration is the cost of filing for bankruptcy. Filing typically costs a couple of hundred dollars, but hiring an attorney to represent you and protect your interests could cost a great deal more. Although individuals can act on their own behalf without an attorney, by going it alone you run the risk of losing certain rights or property. Generally speaking, because of their knowledge of bankruptcy law and experience with the courts, an attorney can be worth the money. As mentioned above, bankruptcy will remain on your credit reports for years into the future, and those reports may be consulted by potential lenders, insurance companies, landlords, employers, and others. You can’t do anything to remove the information ahead of schedule, but it’s worth checking to make sure that it’s accurate and doesn’t cast you in an even more negative light. You are entitled to at least one free report each year from each of the three major credit bureaus—Equifax, Experian, and TransUnion—through the official, federally authorized website, Annual Credit Report.com. If you find any errors on a report, you should ask that that they be corrected. Aside from your credit report, bankruptcy is also a matter of public record. So bear in mind that anyone can request a copy of the filing. Because your credit is severely damaged by bankruptcy, you may find it difficult to borrow if you need to, including a loan to buy a car or a mortgage to buy a home. It will also be difficult to obtain a conventional credit card. One alternative is to apply for a secured credit card, where you deposit money with the card issuer to back up your line of credit. If you use the card judiciously, making all your monthly payments on time, you may soon qualify for a regular, unsecured credit card. A secured credit card is often recommended as a tool for rebuilding a damaged credit record.
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
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