The 7 Deadly Mistakes People Do Before Filing Bankruptcy

Do Not File Chapter 7 Until You've Read This!

There is nothing more frustrating than filing a Chapter 7 Petition and then learning that you've messed up in a major way because of something that could have easily been prevented.

As a bankruptcy attorney here in the San Francisco Bay Area, I have a checklist I go through with my clients to make sure that we identify any "red" or "yellow" flags. These flags are items that the Bankruptcy Trustee may question you about at your Meeting of Creditors, and if not handled properly, could even cause dismissal of your case. My experience is that if you identify, disclose, and prepare for the items listed below, you'll greatly increase your chances of your case going through smoothly.

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1) Paying Debts Back to Family or Friends. Paying debts back to family or friends can pose a huge problem for both you and your family member or friend. The Bankruptcy Code requires that any payments over $600, made to family or friends within the past year, be disclosed on the bankruptcy paperwork. Depending on your situation, the Trustee may demand that the money you re-paid your family/friend be turned over to the Trustee. Imagine your loved one getting a letter from a Bankruptcy Trustee asking that they return the money you paid them. This could cause embarrassment, as well as a financial mess for your loved one who would have to come up with the money. If you're considering bankruptcy and owe money to a loved one, the best thing is not to pay them back now. If you've already made such a payment, talk with your attorney about disclosing this properly and how to handle it.

2) Taking Cash Advances or Using Credit Cards Immediately Before Filing. A huge red flag, especially with creditors, is using your credit cards fairly close to the date you file for bankruptcy. If you are a debtor and have a bit of credit available on your credit cards, DO NOT decide to max it out and/or take a cash advance thinking you will be able to discharge it as part of your Petition. Why? Because your creditors, and the Trustee, will likely see your actions as fraudulent. This would then mean that your Petition could be dismissed and/or you may even face serious consequences such as criminal prosecution. Once you decide that bankruptcy is the path for you, stop using credit cards completely!

3) Transferring, Giving Away or Hiding Assets. Don't transfer your assets to anyone else and definitely don't hide anything (i.e. that second or third car, that timeshare in Cabo, that joint account with your girlfriend, etc.) because non-disclosure of assets is a HUGE no-no. Failure to disclose all your assets could greatly, and negatively, affect your case. For example, at a recent Meeting of Creditors, I witnessed the Trustee demanding that a debtor (not my client!) send the Trustee a check for $9,000 because the debtor could not explain why their reported bank balance did not match the bank statement. In extreme cases, failure to report and/or hiding assets can cause the Trustee to dismiss your case.

4) Your Income Is Greater Than Your Expenses. When filing for bankruptcy, you'll need to calculate your income and compare it with your expenses. Your expenses must be reasonable, and what the law considers reasonable is sometimes surprising. Clearly, expenses for your dog Mr. Muffins would not be legitimate expenses for you to take into account. But even things like paying for your child's college tuition might not be able to be included. If from the get-go, your income is greater than your reasonable expenses, you clearly will have a problem. The Trustee will wonder why you are not able to pay your bills, and could move to dismiss your case or have it converted to a Chapter 13 (the type of bankruptcy where you pay your debts back to creditors over time.) So before you file, make sure that you do your calculations, and make sure you don't have any expendable income.

5) Banking With Your Creditors. If you're considering bankruptcy, and have a bank account with a company to whom you owe money, you need to take action fast. Immediately close that account (make sure you have a paper trail) and open an account someplace else where you don't owe money. Why? Because the bank to whom you owe money can easily freeze your account and/or pay themselves what you owe from your account. Yes, it seems unfair, but unfortunately, it frequently happens. I recently had a client that banked with their mortgage holder, and who made the mistake of not closing their bank account (even though I urged them to do so). Since the clients were behind on their mortgage, you can guess what happened to the $500 in their bank account. That's $500 they could have used to keep food in the fridge.

6) Making Major Financial Decisions. When you're in financial distress, it often feels like you have to do something, anything, to regain control of your finances. And sometimes, unfortunately, people react without getting all the information about what a specific transaction may mean to them. Example: Trying to avoid bankruptcy, Jane contacts a credit counseling service in order to deal with her $50,000 in credit card debt. One of her creditors settles the account and forgives $15,000 worth of debt. Without intending to or realizing it, Jane may be taking on a tax liability; any amount creditors have "forgiven" may be taxable. Thus, Jane still owes $35,000 to other creditors, and may owe taxes down the line on a portion of the $15,000 that was forgiven.

Other major decisions that should be avoided if contemplating bankruptcy are short-sales, debt consolidation, tapping into retirement accounts, and selling a vehicle or home. The intent behind bankruptcy is to give people a clean slate as possible; in order to get that clean slate, avoid making any major financial decisions prior to consulting a bankruptcy attorney.

7) Hiding Any Information That You Think Should Be Disclosed. Please - when filing for bankruptcy, don't lie, and don't hide anything - because the Trustees have a pretty good knack for knowing when someone is not being truthful.

A typical trustee sees about 10 cases per hour for about 6 hours a day, 2-3 times a week. That's about 180 cases a week, 720 cases a month, 2160 cases a year! With those numbers, you can get the picture that the Trustees have seen it all, heard it all, and are really good at reading people. When it comes to bankruptcy, not disclosing something is often worse than having it disclosed it the first place. As a bankruptcy attorney, I always tell my clients - if in doubt about whether to disclose something, trust me - and tell me about it. I can help you prepare for when it does come up. To do otherwise is a huge risk, and frankly, not something I would consciously allow a client to do. I work with people that need help, but I will not represent someone that is looking to lie, deceive, or abuse the system.

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