Considering Bankruptcy? Don’t make a critical mistake before you even get started Obviously, most people considering bankruptcy are facing very tough financial times. Difficult circumstances can drive us to desperate action. Unfortunately, however well-intentioned that action is, sometimes it can backfire. In order to avoid some of the most common (and costly) pre-bankruptcy missteps:
1. DON'T give up your retirement account unnecessarily
Some people considering bankruptcy liquidate retirement accounts with the most honorable of motives—in a futile attempt to catch up those mounting debts. Others are attempting to reduce assets before filing. However, most retirement funds in qualified ERISA accounts are protected, and you may be able to discharge your debts and keep your retirement account.
2. DON'T ignore lawsuits against you
It may seem reasonable to assume that if you’re going to file bankruptcy anyway, there’s no need to appear in court or to respond to pending lawsuits. A judgment can be discharged in bankruptcy, right? That’s true, but until your bankruptcy case is filed, any pending legal action will continue to move forward. It’s important that you protect your rights--and protect your property from liens--until a stay from the bankruptcy court takes over. Don’t let an unsecured debt turn into a secured debt by failing to respond.
3. DON'T take out cash advances, run up your credit cards, or take out new loans
It’s easy to think that if bankruptcy is just around the corner, it doesn’t matter how much you charge today. After all, those debts are going to be wiped out in the bankruptcy. Don’t be so sure. Certain debts incurred within 90 days before filing for bankruptcy are presumed to be non-dischargeable. That means that if you use your credit cards recklessly before bankruptcy, you may find yourself obligated to pay those charges.
4. DON'T transfer property out of your name
Some people considering bankruptcy hope to protect property like homes, cars and cash by transferring property to a friend or family member before filing for bankruptcy. That’s far from a simple proposition: the bankruptcy trustee may be able to reverse a transfer of property if it was made in an attempt to hide assets from your creditors, and such transfer open up the whole case to closer scrutiny and challenges by creditors. And, in many cases it’s all for nothing, since exemptions may protect property like your home, your automobile, and your wedding rings.
5. DON'T pay back friends and family while ignoring other creditors
Naturally, when people have limited resources, they want to make sure those closest to them are taken care of, and that they honor the commitments they see as more personal. In bankruptcy, however, all creditors are entitled to a proportionate share of any funds available to pay your debts. Preferring one creditor over another is not permitted. If you've made payments to a family member within a year before filing bankruptcy, the bankruptcy trustee may be able to take action to recover that money from your family member and distribute it proportionately among all of your creditors.
6. DON'T withhold information from your lawyer
Bankruptcy petitioners sometimes think they have good reasons for hiding information from their attorneys or putting just a little spin on that information. Some simply don’t want the attorney to think badly of them, while others are attempting to protect certain property by not disclosing it. However, your attorney cannot effectively protect your interests without complete information. You could lose assets, have your bankruptcy case dismissed, or even face criminal charges. And, your attorney may withdraw from your case if you're dishonest with him.
7. DON’T try to handle your own bankruptcy if you’re not well-versed in bankruptcy law and procedure
These are some of the most common mistakes people make prior to filing for bankruptcy protection, but they’re hardly the only ones—and the bankruptcy process itself provides a host of new opportunities for critical error. It's easy to make a mistake if you don't know the ins and outs of bankruptcy law, and even innocent mistakes can be costly. Talk to a bankruptcy attorney in your state to learn about the requirements and restrictions and your rights before taking ANY action.
Attorney Kevin Chern is the former managing partner of the nation’s largest consumer bankruptcy law firm. He currently serves as President and co-founder of Total Bankruptcy, Inc., the first nationwide network of consumer bankruptcy attorneys. The Total Bankruptcy website, at www.totalbankruptcy.com, provides thousands of pages of free information about bankruptcy, debt, credit, mortgage foreclosure and economic issues.
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