8 Mistakes you don’t want to make

The bankruptcy process is a complicated legal maze with rules that often don’t follow the natural choices we make in everyday life. These are some serious mistakes that you don’t want to make leading up to a bankruptcy filing:

1. Repaying friends, family members, or business partners prior to filing

Any payments to these “insiders” within one year prior to filing bankruptcy are considered preference payments and can be recovered by the bankruptcy Trustee to equally distribute amongst all of your creditors.

2. Transferring assets out of your name prior to filing

Many people facing debts are concerned about creditors coming after their assets and think that if they simply transfer them to a friend or family member, the assets will be safe. This is not true in bankruptcy and not true in general. Transferring assets out of your name can be considered fraud if you do not receive fair market value for the item. Furthermore, you might be transferring an asset that would be exempt in a bankruptcy or from creditors in general.

3. Getting a credit card or loan with a credit union

Credit unions tend to have slightly lower interest rates than regular banks. However, they are terrible to deal with in a default situation. Credit unions tend to cross-collateralize debts such as credit cards, lines of credit and home equity loans with other assets that you have with them such as car loans and your bank account. If you default on your credit card or line of credit, you could lose everything that you have invested or leveraged with the credit union.

4. Banking at the same institution where you have credit cards or loans

Normally, in order to seize funds from your bank account, a creditor must sue you, get a judgment against you, find out where you bank, and file court papers to garnish your bank account. However, if you bank somewhere you owe a credit card or loan and they slip something in the small print when you acquire the card or loan granting them permission to take payments directly out of your account in the event of default, the bank may simply sweep your bank account if you fall behind. It is better to not take any chances and switch banks to avoid not being able to pay your monthly bills.

5. Significant credit card usage prior to bankruptcy

Many clients ask what is to stop them from making a lot of new charges on their credit cards when they have decided to file. The answer is simple. You will get stuck paying the debt back because the creditor will contest recent credit card usage prior to a bankruptcy and those debts will likely not be wiped out. Don’t make a bad move that will interfere with your fresh start.

6. Opening or maintaining a joint bank account with anyone other than your spouse or transferring money in or out of your bank account to someone else’s account

When you file bankruptcy, the Trustee will be looking at your last several bank statements. You do not want to complicate matters by having your name on someone else’s account that is not yours. It makes it difficult to determine what belongs to you and what belongs to the other person. Similarly, you do not want to pay someone else’s bills out of your account or transfer money into someone else’s account to pay your bills because it may appear that you are making too much money, making fraudulent transfers, or repaying a debt to a friend or family member.

7. Cashing out a retirement account or taking a 401(k) loan to pay down debts

Retirement accounts are protected from creditors and are necessary to preserve if you plan on retiring some day. We see many clients that exhaust their retirement accounts and then end up having to file bankruptcy anyway because they still have remaining debts that they cannot pay with their now tightened budget from having to pay a 401(k) loan back or taxes on their cashed-out IRA.

8. Waiting too long to get legal advice

These mistakes and many others can be avoided by consulting an experienced bankruptcy attorney when you are struggling with debt. Every situation is unique, and if you wait too long to get counsel, you are bound to make mistakes. However, when you get legal counsel early on, we will help you protect your assets and will make the process as smooth and painless as possible.