Perhaps you've found yourself in a difficult financial situation caused by high medical bills and loss of income, or a recent divorce. Your debts are piling up, and there's simply not enough money to pay your creditors what you owe them. If you're thinking that your only option may be bankruptcy to eliminate your debts, be very careful. There are some detrimental financial moves that can hurt your bankruptcy case. It's important that you avoid these mistakes so that your bankruptcy filing is a smoother process, rather than one fraught with challenges from your creditors, or the bankruptcy trustee.
TRANSFERRING PROPERTY OR MONEY
People often believe that if they transfer or gift assets, such as houses, cars and cash to relatives or others that those assets will be safe from the bankruptcy. This is a complete fallacy, and in fact, transferring assets does little to protect your assets. Worse yet, if such transfers are not properly disclosed in your court documents, these attempts can be construed as fraudulent by the court, even if you had no intention of concealing the assets. If an attempt to conceal them is intentional, the failure to disclose them could result in a criminal investigation by the FBI and a criminal prosecution.
Remember that just because you have assets, it doesn't mean that you can't file a bankruptcy and protect them. Also, a qualified attorney can help you legally "shelter" (i.e. protect) assets in many circumstances. So, with proper legal advice and planning, you can likely avoid the pitfalls and loss of assets that otherwise could have been protected if handled correctly. Also, just because you file, does not mean that you will necessarily lose your assets. The reality is that most people are able to keep their personal assets when they file for bankruptcy, so hiding them is completely unnecessary.
PAYING OFF CERTAIN CREDITORS
You might think that you'll improve your chances of obtaining a bankruptcy if you attempt to pay off some of your debts before you file. This, however, is misguided, and potentially damaging to your case. If you make an out-of-the-ordinary payment to completely pay off a creditor, it is called a preferrential transfer. What that means is the creditor received payment in preference over other creditors that hold the same weight or classification. Often, the bankruptcy trustee will sue the creditor, called a "claw back" lawsuit, to get the money you've paid them back so that it can be distributed equally and fairly to all creditors within the same class. This process will delay your filing and ultimate discharge. Also, some have the impression that if they pay off a certain account prior to filing for bankruptcy, they will be able to keep the account open. Whether or not a creditor elects to maintain your account is unpredictable at best. Even if a creditor does not suffer a financial loss as a result of a bankruptcy, it is not uncommon for your account to be closed So, by pre-paying an account in order to preserve the account is likely just throwing that money away for no benefit to you.
USING YOUR CREDIT CARDS
Perhaps the first thing that you should do if you're having financial problems that are leading to bankruptcy is to stop using your credit cards right away. That means no shopping for clothing, electronics or any luxuries. It also means not taking out any cash advances against your credit cards. You can, however, continue to use a debit card that is connected to your bank account to pay for the things you buy. However, to reduce the complications of theft resulting from a stolen debit card used for any transactions, it's best to use a card not linked to your bank account. Rather, use a pre-paid card onto which you can deposit funds, plan your spending, and deposit money onto the card as you use it. In the event of identity theft, you can substantially reduce the amount of money stolen by using this strategy. You can also use this strategy to help you stick to a pre-planned budget and avoid overspending. If you plan your expenses and only have a certain amount of money available on the card to make those planned expenditures, you can more easily resist impulse purchases.
DEPOSITING EXTRA MONEY INTO YOUR BANK ACCOUNT
The only money that should be deposited into any of your bank accounts should come from sources of income. That can be from your job, but it can also be from work that you do for others outside your job. It can also include pension income, social security income, or other regularly received unearned income Never deposit anything else, like a check for a friend, or money that belongs to someone else that you're just holding on to. Likewise, don't accept checks or cash to deposit from friends and relatives that are trying to help you overcome your financial shortfalls. If you own your own business don't run your business transactions through your personal accounts, keep everything separate to avoid confusion and the appearance of fraud.
ACCEPTING FUTURE PAYMENTS
Remember that all of the payments that you expect to receive in the future, are part of your bankruptcy estate, the same as the funds that you currently have. In other words, your bankruptcy trustee can, and most likely will, seize future money and use it to repay your creditors. Future payments include such things as tax refunds, or and potentially an inheritance or life insurance death claim benefit, depending upon when you become legally entitled to receive it (not when it's actually paid). While you may not be able to stop those payments from coming to you, be very aware that they effectively become the property of the bankruptcy court until such a time as your creditors are satisfied. Therefore, it again becomes important to seek a qualified attorney to discuss these issues and determine if it might make sense to plan the most beneficial time to file the case or to assess the legal "sheltering" of any potential future payments.
If you're preparing to file for bankruptcy, and you cannot avoid some of these items, remember that there are “look back” periods for many of them. What that means is the courts will only take into account certain types of transactions during a specified period of time. You may be able to avoid these issues by simply delaying your bankruptcy filing until those time periods have expired. An experienced attorney can guide you based on your unique situation.