Running afoul of one of these pitfalls can cost you. In some cases, these mistakes may mean losing assets you could have kept. Others may mean you receive a case dismissal, instead of a discharge. I
n the most severe cases, bankruptcy mistakes like the 7 listed below can even lead to being charged with bankruptcy fraud, a criminal charge.
1. Settling debts.
Settling debts is rarely a good idea anyway. It doesn’t fix your credit, and it doesn’t fix your financial situation.
But it’s an especially bad idea close to a bankruptcy. Why settle a debt that could have been discharged? The money you spend could go to filing the case.
2. Paying favored creditors.
The favored creditor is most often a family member or a friend. But it doesn’t matter if the favored creditor is a business. Sometimes people do try to pay businesses they’ve had a good relationship with in the past.
But you must treat all creditors the same. Any payments should be distributed by the trustee. In fact, the trustee can sue anyone you pay to get that money back.
If the debt is owed to a family member or friend you can’t pay them within one year of filing for bankruptcy. If the debt is owed to someone who was not a family member or friend you should not pay it within 90 days of filing.
There are some exceptions, but for most filers this will be a good rule of thumb to follow no matter what.
3. Cashing out your retirement fund to pay creditors.
As long as you don’t withdraw any funds, every dime in your retirement account is likely to be protected. There are exemption limits, but few who are filing for bankruptcy have enough in their accounts to activate them.
The moment you touch that money it becomes part of your bankruptcy estate. You will need that money when you can no longer work. Bankruptcy will handle your creditors. There’s no good reason to give them another dime that the trustee doesn’t order.
4. Make large purchases or take out large cash advances.
A large purchase within 90 days of filing can result in a debt that isn’t discharged. There is an assumption that doing this right before bankruptcy is an attempt to defraud creditors.
You, personally, might not have thought about filing bankruptcy until one day before you did. You might have come to a revelation about your finances and realized you were in over your head. The big purchase could have been completely innocent. But it still looks like you never intended to pay your creditors at all.
5. Transferring property out of your name.
If you transfer assets out of your name within 2 years of your bankruptcy case, and don’t receive what it’s worth, the court will call it a fraudulent transfer. Selling your car worth $2000 for $2000 because you need the money or have decided to cut down on the number of cars you have is probably fine, especially if you can show you used the money for basic living expenses. Selling your car to your aunt for $1 is not.
In many cases people will transfer assets this way with a verbal agreement that your relative will give the property back after the bankruptcy is done. This is seen as an attempt to defraud your creditors and the court.
Sometimes the transfer is very innocent. For example, transferring the title of a car to a child who has just turned 18 is a common transfer, but it can still be a problem if it happens within 2 years of the exchange.
But if the transfer is done out of a knee-jerk reaction to the bankruptcy, and you’re attempting to protect yourself, stop and take a breath.
The bankruptcy process is not meant to leave you with nothing. A great deal of what you’d want to protect, such as cars, personal jewelry, or your house, is already covered by federal or state bankruptcy exemptions. Let the law and your attorney protect your property, and disclose any transfers you have made (such as the car to your child) so your attorney can help you take the next step in a way that doesn’t threaten your case.
6. Failing to disclose expected windfalls.
Expected windfalls like a tax returns, the proceeds of a court case, an inheritance, or an insurance payout should all be discussed with your attorney. Failing to disclose could mean your attorney is unable to craft the strategy that would help you keep as many of these assets as possible.
And it is about being strategic. A good bankruptcy attorney doesn’t just file paperwork. A good attorney advises you on how best to proceed with your specific situation, and that means being a good problem-solver.
7. Failing to be honest with your bankruptcy attorney.
Some people make these mistakes and are so embarrassed they don’t want to tell anyone, not even their attorney.
But if your attorney doesn’t know, your attorney can’t help.
The consequences of a botched bankruptcy can be serious. Don’t try to go it alone and don’t try to do it without the help of a good attorney who knows your situation inside and out.