What You Should and Should Not Do Before Filing Bankruptcy

Each year bankruptcy filings trend upwards at the beginning of the year and level off as the year progresses. The combination of the momentum from the start of a new year and the additional income from tax refunds provide ample motivation for potential clients to eliminate their financial problems caused by either loss of income, unexpected medical bills or ever-increasing household expenses. Armed with tax refund money and a desire for a fresh start to a new year, many potential clients come to our office during the first quarter of the year eager to file their bankruptcy case.

While there are some steps a potential client can take to make the filing process easier, such as gathering credit reports and recent pay stubs, there are also some actions that potential clients should definitely avoid in anticipation of filing bankruptcy. The actions that should be avoided include, but are not limited to, the following:

1. CASHING OUT OR WITHDRAWING LARGE SUMS OF MONEY FROM RETIREMENT ACCOUNTS WITHIN SIX MONTHS OF YOUR ANTICIPATED FILING DATE. The determination of whether the amount withdrawn is large enough to impact your bankruptcy filing varies for each individual. Therefore, a bankruptcy attorney should be consulted prior to withdrawing retirement funds if you are considering filing for bankruptcy. While the funds that remain in a tax-exempt retirement account are exempt from creditors, once these same funds have been withdrawn they are viewed as household income to be included in the means test if received during the six months prior to filing bankruptcy. This additional income reflected on your means test calculation may affect your ability to qualify for Chapter 7 or may result in increased Chapter 13 monthly plan payments.
2. CHOOSING TO PAY OFF DEBTS OWED TO FAVORED CREDITORS OUTSIDE THE NORMAL COURSE OF BUSINESS WITHIN 90 DAYS OF FILING. An example of this would be paying the $5,000.00 balance in full for one of your credit card accounts within 90 days of your expected filing date to avoid listing the company as a creditor in your bankruptcy. Choosing to pay off a particular creditor outside the normal course of business within 90 days of filing can be considered a preferential transfer by a trustee. If the repayment is determined to be a preferential transfer, the Chapter 7 trustee can sue the creditor to force the return of the funds for the benefit of all your other creditors. If you are filing a Chapter 13, you may be forced to pay back to your other creditors the amount you repaid to the preferred creditor, resulting in higher Chapter 13 monthly plan payments. (preferential transers)
3. REPAYING LOANS OWED TO FAMILY MEMBERS WITHIN ONE YEAR OF FILING. An example of this would be paying back the $2,000.00 debt you owe to your parents within a month of your anticipated filing date. As discussed in (2) above, your family member may be sued for the return of the funds by the Chapter 7 trustee or you may end up having to pay the amount you repaid your family members to your other creditors, resulting in higher monthly plan payments if you file Chapter 13 bankruptcy. (preferential transfers)
4. TRANSFERRING ASSETS OUTSIDE THE NORMAL COURSE OF BUSINESS WITHIN 2 YEARS PRIOR TO FILING. An example of this would be transferring the title of a vehicle you own free and clear to your relative shortly before you plan to file. Bankruptcy trustees have the power to avoid or undo these types of transactions made prior to filing and bring the transferred property back into the bankruptcy estate. Therefore, it is always best not to make any transfers of either real or personal property before filing.

As previously stated, this list does not include every action that should be avoided prior to filing bankruptcy. Also, it should be noted that the lack of either knowledge or fraudulent intent does not come into play when considering the consequences of the actions listed above. For example, although you may not have known it wasn't a good idea to withdraw $30,000.00 from your 401(k) within six months of filing, that still does not change the outcome if that withdrawal results in your disqualification for Chapter 7 bankruptcy. Therefore, if you anticipate the need to file bankruptcy within the near future, it is best to consult with an experienced bankruptcy attorney to guide you through the do's and don'ts in anticipation of filing.

If, on the other hand, you have taken any of the steps that should be avoided in anticipation of filing, you should still consult with an experienced bankruptcy attorney to determine what course of action should be taken, such as postponing your filing or considering alternatives to bankruptcy. Over the years, we have assisted many clients in preparing to file bankruptcy and have successfully guided them through the bankruptcy process. If you are considering filing for Chapter 7 or Chapter 13 bankruptcy, call Douglas County Bankruptcy Lawyers today for a free consultation.