Don't Make These Common Mistakes When Considering Bankruptcy

Bankruptcy is supposed to give us a legal way to wipe out our debts. Debtors can receive a Personal Bankruptcy Chapter 7 discharge once every eight years or a Chapter 13, once every six years. In rural areas of the country, a third option – Chapter 12 Family Farms – is also possible.

Once they realize they need to file, most find it’s in their best interests to do it quickly. One of many such examples is when you are dealing with a wage garnishment: the sooner you file, the more you’ll have available to pay undischarged debts.

There are some important do’s and don’ts to keep in mind before (and after) you file for bankruptcy protection that will keep you on the right side of bankruptcy judges and trustees.

Be Careful How You Use Credit Cards before You File

Bankruptcy courts are not big fans of those who frivolously use credit cards right before they file for bankruptcy. Some purchases may even constitute fraud, depending on the nature and timing of the purchase. Some bankruptcy judges may forgive debtors who make (and can prove) necessary credit card purchases right before bankruptcy. But those filers must be very careful about charging items when they have no intention of paying the money back.

Don’t Pay off Personal Debts Before Filing

Paying off a debt before filing your bankruptcy can cause problems, basically because it creates an appearance that you are favoring those personal debts and displaying preferential treatment. When that happens, the trustee can (and often does) try to get the money back for more equitable distribution to creditors.

Avoid Using Your 401(k) to Pay down Debt

Many 401(k) plans allow users to borrow against their retirement savings, a relatively low-interest loan option to consolidate credit-card debt. But it can significantly hobble your retirement savings. Using your 401(k) as a bridge loan doesn’t really address the core problem of how you got into this debt crunch to begin with -- it merely delays a painful and inevitable financial reckoning.

Don’t Transfer Property Immediately Before Filing

Some gifts or other transfers of property can be reclaimed by a bankruptcy trustee. If you transferred property prior to filing, you might also become a target of bankruptcy fraud investigation for intent to hinder, delay, or defraud a creditor.

Complete Mandatory Credit Counseling

Before filing for bankruptcy, you are required to complete a credit counseling course by an agency approved by the bankruptcy court. You must complete it within 180 days (six months) of filing your petition. Your certificate of completion must accompany your petition when the court holds its final “discharge” hearing; and after you file your petition, you must also successfully complete a debtor-education course before your discharge hearing.

Don’t Blow-Off Your 341 Hearing

The worst possible thing that can happen after missing ANY bankruptcy hearing is that the judge could dismiss your case. This is not good. Then you have to re-file, remit new filing fees and court costs, and pay more money to your attorney to essentially start all over. And all the while your debts continue to eat-away at your spirit and shrinking finances. So make that 341 and ALL of your subsequent hearings. It shows the judge you’re serious about this matter.

Obey All Court Orders

If you are involved in a collection lawsuit, you have to follow all state court orders. Collection cases may proceed against you until you have filed for bankruptcy protection, so don’t make the mistake of disregarding legitimate court-ordered collections as you prepare to file for bankruptcy. Any standing state orders of collection are considered by the bankruptcy judge. After you have filed your petition, you must abide by all orders from any court unless your bankruptcy judge or trustee says differently.

And Always Disclose the Whole Truth, No Matter How Much It Hurts

A good attorney is your most valuable asset when declaring bankruptcy. But you must tell your lawyer and the court the whole truth – warts and all – about the state of your financial matters. It’s the only way to produce the best outcome and put your hardship completely behind you.