If you’ve lost a job, been through a divorce or are overwhelmed by medical expenses, you may be considering bankruptcy. Depending on your circumstances, you may choose the debt reorganization of Chapter 13 or complete debt forgiveness of Chapter 7 as the most effective option. Either way, there are some things that you should NOT be doing prior to filing that could adversely affect your outcome.
So if bankruptcy seems like it may be a viable option, stop and take stock. Knowing what to expect can help prepare you for the best possible result.
Don’t Max Out Your Credit Cards
If you’re already in dire financial straits it may seem reasonable to rely on credit cards. However, courts do not look favorably on debtors who have racked up a lot of their debt immediately preceding a bankruptcy filing.
Ultimately the courts want to help you, but they also want to protect against fraud, so if you suddenly go on a spending spree, max out your credit cards and then ask for debt forgiveness, that will look suspicious.
If you must use a credit card, limit your expenses only to necessities like food, or gas to travel to work. The new Prada shoes and daily trips to the local high end steakhouse may not be your best bet if you’re preparing for bankruptcy.
Don’t Sell Off Your Assets
Again, this may seem like a reasonable thing to do – after all, you need the money, so what better way to get an influx of quick cash than to offload artwork, that big screen TV or even a bit of property you own?
Or perhaps you’ve heard that you can lose your assets in a bankruptcy, so you give your prized possessions to family or sell something valuable to a friend for a lot less than it’s worth just to keep it from being taken from you.
But selling property or transferring it out of your name is a risky proposition. The court may consider such activity “fraudulent transfer” and interpret it as an effort to hide the asset, whether or not your intent was genuine.
In this case, the court will attempt to infer your intent based on the amount you received for the asset vs. its real value, the timing of the sale or transfer, who you sold or transferred the property to, what you did with the proceeds and more.
That can lead to delays, repossession of the property from the person who received it or even a refusal to approve your bankruptcy filing. Your best bet is to leave your assets as-is and speak with an attorney.
Don’t Cash Out Your Retirement Account
Unlike your other assets, retirement accounts are typically afforded much broader protection from creditors. In addition, there may be serious penalties for cashing out early, which certainly won’t bode well for your future financial health.
We’ve debunked this myth before, but people often mistakenly believe that they will lose everything in a bankruptcy.
Before you jump the gun and start liquidating your own assets or looking for quick cash in all the wrong places, speak to an attorney about your options. Depending on your income, whether or not you want to keep your home and many other factors, there are ways to take advantage of the legal protections already in place for individuals and families experiencing hardships.
Don’t Cash Out Stocks Or Bonds
Much like selling or transferring property, cashing out stocks and bonds could be viewed by the court as an attempt to hide assets.
While there may be instances in which cashing out a stock to pay an expense – like a legal fee – may be acceptable if you document it properly, it is typically not worth the risk. Besides, some assets may be exempt anyway, so your efforts to move, hide or protect them may not only be unnecessary but may be in vain if they end up getting your case dismissed.
Don’t Close Your Bank Accounts
If you close out your savings account in an attempt to protect your savings from creditors, that is considered fraud and can result in your case being dismissed, or worse, criminal prosecution.
Even if you use the money to pay off a credit card before filing bankruptcy, the money may be repossessed anyway if the court determines it to be “preferential treatment” toward a debtor. That may result in the credit card being closed or defaulted and have an unfavorable impact on your credit score.
You can work with your attorney on a reasonable exemption plan that won’t land you in even more hot water.
Don’t Refinance Your Home
If you’re overwhelmed by debt or underwater on your mortgage, you may not qualify for a refinance anyway. But even if you do, refinancing your home to pay other debt may seem like a viable short term solution, but is really just trading debt for debt – a long term proposition that is not only bad for your ability to file bankruptcy but bad for your financial well-being.
Also consider that the process of refinancing is not free. You will incur closing costs, legal fees and more, all of which only adds to your already existing debt.
It’s tempting to look for quick fixes and easy outs when debt seems insurmountable, but bankruptcy may actually be the better option. Work with an experienced attorney to discuss your options and the best way to protect your long term financial prospects.
Contact us for a free consultation and let us help you find solid financial footing again.