Every year, millions of people think about declaring bankruptcy. They’re in over their head, financially, and they know they need some way out.
Bankruptcy could be the answer you’ve been looking for – and it won’t doom you to financial ruin forever. But before you take next steps, there are some important tips you’ll need to follow and some major risks you’ll need to avoid.
If You’re Considering Bankruptcy, Do The Following
These are some of the most important things to do if you’re considering bankruptcy:
1. Take bankruptcy seriously
Bankruptcy is a concept familiar to most of us, whether we learned it in a financial responsibility course or are only familiar with it from board games. Because of this, it seems like bankruptcy is a trivially easy way to dismiss all your debts.
In reality, filing for bankruptcy can be time-consuming and difficult, and may not necessarily eliminate all of your debts. Before you make any big decisions about bankruptcy, make sure you’re thinking about it with the right mentality.
2. Talk to a lawyer
Next, talk to a lawyer. You can do some research on your own, learn about the different types of bankruptcy and whether you’re an appropriate candidate for any chapter.
But you’re going to get even more information and professional advice if you discuss your financial situation with a bankruptcy lawyer.
Your lawyer will help you understand your current circumstances, make a recommendation on how to file, and guide you through the other important steps leading up to the filing. They’re going to be your greatest resource and your greatest ally in this pursuit.
3. Be honest with an attorney
When talking to your lawyer, be forthcoming with your financial circumstances and recent property and money transfers or sales.
You might be tempted to hide some of your debts or some of your assets for personal gain or to avoid specific penalties, but it’s only going to make your life more complicated if they are revealed later.
Try to be open, transparent, and straightforward with all information pertinent to the bankruptcy. An attorney may ease your stress by informing you that what you believed was a major issue is actually insignificant.
4. Get organized
Before you actually file for bankruptcy, consider getting organized. Take inventory of all your current accounts, including all of your debts, assets, household income, and expenses. Thorough record-keeping will result in an easier bankruptcy process.
5. Pay regular bills and expenses
One should continue to pay utility bills, including electric, gas, water, telephone, internet, and cable. Also, prior to filing, you may wish to reduce your bank account funds by food shopping. Additionally, if a person wants to keep their car or house, they should continue to stay current with mortgage and auto financing payments.
If You’re Considering Bankruptcy, Don’t Do the Following
Whether you’re in the early stages of considering bankruptcy or you’re following through on the actual filing, these are some of the most important things to avoid:
1. Don’t rack up new debts
If a creditor believes that a debtor (person filing) has incurred debt by fraud, the creditor may file a complaint with the bankruptcy court requesting that the debt not be discharged (eliminated). If the creditor is successful, the debtor will still owe this debt after the bankruptcy case is complete.
Some of the facts that the bankruptcy court considers in determining fraud are as follows: when was the debt incurred; were any payments made; what was the debtor’s income and expenses when the debt was incurred; the reason for the charges.
2. Don’t pay back loans to relatives
The bankruptcy trustee administers each bankruptcy case. In certain situations the trustee may be able to sue a debtor’s relative for the money paid back to the relative by a debtor, on a loan. The trustee may pursue the relative for the funds, in the event a debtor paid back a relative in excess of $1k during the year prior to the bankruptcy filing. The $1k amount consists of all payments made by the debtor during the one year period.
3. Don’t pay certain debts back to creditors
If a debtor paid in excess of $600 to an unsecured creditor during the three months prior to the bankruptcy filing, the trustee may sue the creditor for the funds. The $600 includes all payments added together during the three month period.
4. Don’t withdraw retirement funds
In most states, a bankruptcy filing allows a debtor to keep and save a substantial amount of retirement funds that are protected by the bankruptcy laws.
If retirement funds are withdrawn to pay unsecured debt, the debtor will lose the funds.
Typically, if the debtor does not use the funds, the debtor will be permitted to eliminate the debt and keep the funds from the creditors.
5. Don’t give away property
The bankruptcy code allows a debtor to keep property based on the application of exemptions. However, property cannot be exempt if they are given away.
Therefore, in certain situations, the trustee may be permitted to sue the person for the money or the property.
Also, gifting people valuable assets prior to the filing may be considered fraud, thereby preventing the debtor from obtaining a discharge on their debts.
Talk to a lawyer in your area about your bankruptcy filing options and do your research before you finalize any decisions.