What NOT to Do Before Filing Bankruptcy

Most people who file a Chapter 7 or Chapter 13 bankruptcy have done everything they could to avoid filing, or even consulting with a bankruptcy attorney. People take pride in being to solve their own financial problems. Unfortunately, sometimes their honest attempts to do what they think is best end up jeopardizing their chance for a financial fresh start.

Here are some things that you should NOT do if bankruptcy is a possibility in your near future--even if they initially seem like a good idea.

Don’t spend down your retirement accounts. When there are piles of bills to be paid, the temptation to borrow from your 401(k) or other retirement accounts in an attempt to stave off bankruptcy is great. After all, it’s your money, it’s just sitting there, and you need it now.

Why you shouldn’t do it: Borrowing from, or completely liquidating, your retirement accounts may not be enough to prevent an eventual bankruptcy. If you leave those funds where they are, they will very likely be exempt in a bankruptcy--meaning that when your debt is gone, you’ll still have your retirement funds. Also, if you do take money from retirement accounts, there may be stiff penalties and taxes that cannot be discharged in bankruptcy. Last but not least, those funds won’t be available when you really need them.

Don’t sell or give away property to friends or family. Another temptation when the possibility of bankruptcy looms is to raise funds by selling your property, or to protect it by giving it to a family member for safekeeping. You get some much-needed cash, and your brother gets your motorcycle for a great price. It seems like a win-win.

Why you shouldn’t do it: Bankruptcy trustees are highly suspicious of transfers of property to friends or family, especially if fair market value was not received for the items. The trustee might undo the transfer. Worse, you may be found to have intentionally committed fraud and have your bankruptcy discharge denied. Worst of all, criminal charges for fraud might be brought against you.

Don’t repay family or friends money you owe them. You don’t have much cash on hand, and bankruptcy seems like a likely option. Shouldn’t you use what little you have to repay your mother for those few months’ rent she gave you the money for? It seems like the honorable thing to do.

Why you shouldn’t do it: If you’re looking at a bankruptcy, your mom isn’t the only one to whom you owe money. The bankruptcy courts don’t permit debtors to give one creditor preferential treatment over others. The trustee has the right to reclaim preferential payments and redistribute them.

Don’t run up your credit card bills. You know you shouldn’t, but you also know that once you file bankruptcy, you’re not going to be able to use your cards, and there are some things you really want. The credit card debt is going to be discharged in bankruptcy anyway; you’re just adding a little more. Is it really such a problem to do a little extra spending before you give up your cards?

Why you shouldn’t do it: People who ran up credit card debt, then tried to have it discharged in bankruptcy, inspired some 2005 changes to the Bankruptcy Code. These changes, aimed at preventing such abuses, lowered the threshold for “luxury” purchases, and extended the period prior to the bankruptcy filing in which purchases are most carefully scrutinized. If the trustee finds that you ran up debt you didn’t intend to repay, he or she may not allow that debt to be discharged, and you’ll be on the hook for it.

There are more “don’ts,” and many “dos,” to observe when considering bankruptcy. Don’t decide on your own. Call our Chicago bankruptcy firm for a consultation.