Before filing bankruptcy, consider these top 10 Do’s and Don’ts to help ensure you have a smooth and successful case!
Do’s Before Filing Bankruptcy:
DO disclose to your attorney what you own. Disclose its fair market value. And disclose all sales or transfers of property in the year leading up to your bankruptcy.
DO continue paying on your car and home (if you want to keep them). DON’T continue paying debt that will be discharged. This includes credit cards, medical bills, and old utility bills.
DO make sure that loans from “friendly” creditors, like family members, are secured. For example, if a family member lends you money to purchase a car, then they should sign the title as a lienholder. This has several benefits. It will reduce your equity in the car. It will save your exemptions for other property. And it will protect your family member by ensuring that they will be paid should the trustee take and sell the car. This should be a legitimate transaction and the title should be signed at the time the loan is made. Don’t grant a security interest after the loan was made. Doing so may jeopardize your discharge.
DO adjust your wage withholdings to reduce the amount of taxes taken out of your paycheck. Reducing the amount of a potential tax refund puts more money in your pocket and decreases the chance the trustee will take it. But don’t reduce your withholdings so much that you end up with a large tax bill at the end of the year. Be sure to use the worksheet provided by the IRS.
DO spend your tax refunds on necessities. This includes home maintenance, medical or dental work, and catching up on the rent, mortgage or utilities. You can also use it for your bankruptcy attorney’s fees. If it is early in the year, it is appropriate and good planning to receive and spend your tax refunds before filing for bankruptcy. Otherwise, the trustee may require you to turn over the tax refunds. The trustee will distribute your tax refunds for the benefit of your creditors (as explained in more detail below).
Don’ts Before Filing Bankruptcy:
DON’T make luxury purchases at least 90 days leading up to your bankruptcy filing. This includes using credit. Doing so could be considered bad faith and result in the denial of your discharge.
DON’T borrow or withdraw from your retirement. Indiana law protects your tax deferred retirement accounts from creditors. But funds in these accounts lose this protection the moment you withdraw them. You could also be liable for taxes and penalties for an early withdrawal. These taxes and penalties may not be dischargeable in bankruptcy and could cause a hardship down the road.
DON’T borrow against the equity in your home to pay unsecured debt. Doing so is basically trading debt that would otherwise be discharged in bankruptcy for debt that you must continue to pay in order to keep the property. The increased monthly payments could also put you in jeopardy of losing your home.
DON’T pay any unsecured creditor $600 or more within 90 days of filing (or 1 year if the loan is from a family member or business associate). This creates a “preference” as it favors one creditor over others. The trustee may force the creditor to return the payment so that the trustee may then distribute it among your creditors.
DON’T transfer property into someone else’s name to avoid creditors and the trustee. Not only is this considered a fraud on creditors, but the trustee can take the property from the person to whom it was transferred. The trustee may then sell the property and use the proceeds to pay your creditors.
About Matthew Cree
Matthew Cree is an attorney and counselor at law focusing on bankruptcy and collection defense in Greenwood, Indiana. His philosophy is to be there with his client every step of the way and to make bankruptcy as stress-free as possible.