What not to do before filing bankruptcy; Talk to a bankruptcy attorney before you do!
Recently, I met with a potential bankruptcy client who I hope to see again next year. A couple of months before coming in to see me they sold their home and netted about $60,000 in profit after paying off the existing mortgage. Instead of purchasing a new home they opted to rent a house and used part of their sale proceeds to pre-pay the rent on that house for a year. The remaining proceeds were mainly used to pay debts owed to family members in various amounts totaling $15,000, and they paid off an existing car loan on a car worth about $10,000. Unfortunately, their income had taken a significant nosedive from prior years, and they still owed a considerable amount of other debt, including $20,000 to the IRS, $30,000 in credit card debt, and they had two lawsuits filed against them just in the past couple of months. After telling them a bankruptcy trustee could go after the pre-paid rent as an asset of the bankruptcy estate, go after their relatives to recover insider preferential transfers, and take their car and sell it in a chapter 7 case, they felt they were better off not filing a bankruptcy case at this time. Instead, they chose to hold the line as best they could for the next year.
If you are, even in the back of your mind, thinking about filing a chapter 7 or chapter 13 bankruptcy case, it is a good idea to avoid doing any of the following until you talk to your bankruptcy lawyer. Talking to your lawyer first can help you avoid painful headaches later down the road:
Don’t sell, give away or transfer ownership of anything before filing a bankruptcy case without first discussing it with your bankruptcy lawyer. Doing so could open the door for a bankruptcy trustee to go after the property you sold, gave away or transferred. In Florida, most transfers can potentially be avoided by a bankruptcy trustee if the transfer occurred within the past four years.
Don’t pay back debts owed to family members, close friends, or to your business or other “insiders.” Money paid back to family members and other insiders within one year before filing a bankruptcy case can often be recovered by a bankruptcy trustee as a preferential transfer. The same is true for your ordinary creditors you might choose to pay off or make extra-large payments to within 90 days of your filing a bankruptcy case. Before you pen the check or hit the pay now button, think twice, then call your lawyer.
Don’t take money out of retirement accounts, like an IRA or 401K. If you withdraw money out of retirement accounts, the funds will likely no longer have any protection from creditors, and you may add to your overall debt by incurring additional income taxes. In Florida monies deposited in your IRA and 401K and other similar retirement accounts are generally exempt from creditor collection actions and bankruptcy trustees.
Don’t use credit cards or incur any new debt. Once you’ve decided to file a bankruptcy case you need to stop using credit cards and stop borrowing money. Any new debt incurred before filing a bankruptcy Petition could prompt an adversary complaint from the creditor to determine that debt should be non-dischargeable in your bankruptcy case, meaning you’ll have to repay that debt.
Don’t ignore lawsuits filed against you. If you ignore the suits and judgments are entered then bad things can follow, like garnishments and asset seizures. If your house is in foreclosure and you want to keep it, especially don’t ignore the foreclosure lawsuit. In Florida, once the foreclosure sale occurs, filing a bankruptcy case after that will not help you! Talk to a bankruptcy lawyer as soon as possible and long before the entry of the foreclosure judgment, so you are aware of all options going forward.
Don’t let anyone put money in your bank and other financial accounts. If you allow a non-spouse to put money into your bank or other financial accounts, perhaps as a favor, or you’re living together, or in a romantic relationship, you will want to stop this before filing a bankruptcy case. You don’t need any commingled funds confusing the bankruptcy trustees when they’re looking at your assets and income. If someone else, other than a spouse, has access to your accounts that also needs to stop. Your accounts should be your accounts and just your accounts.
Don’t hide your assets. Hiding assets, transferring them away for safekeeping, selling them off and stashing the cash in exempt funds before filing for bankruptcy is fraudulent and often criminal and could lead to severe penalties.
Don’t fail to be entirely candid with your bankruptcy lawyer. Your lawyer cannot give you good advice if they don’t know all the facts.
If you’re in a situation where you need to know the do’s and don’ts of filing bankruptcy, please call me at 813-308-9045 to schedule a free office consultation for answers to your specific circumstances. Press on Regardless!
