Desperate times cause many people to file bankruptcy. Before filing bankruptcy, people take actions that may impact their case and their ability to receive a discharge. It is a good idea to avoid doing the four things I lay out below.
Don’t Use Up Retirement Accounts
Retirement accounts such as IRAs and 401(k)s are fully exempt from the claims of creditors. That means the accounts will be fully protected in a bankruptcy case. Therefore, it is not a good idea to withdraw money from retirement accounts before you file bankruptcy. Once money is withdrawn from a retirement account the normal retirement account exemption does not apply to the money withdrawn. This money, if it cannot be exempted under other laws, may be lost.
Avoid Fraudulent Transfers
Any transfers of assets within the two-year period before you file bankruptcy must legally be disclosed in your bankruptcy paperwork. Transfers that occur in the time prior to your filing will always be looked at. Therefore, you will want any transfer that may occur to stand up to the scrutiny.
To be clear, if you own an asset you generally have the legal right to transfer it. However, transfers that are made with the specific intent to defraud creditors or transfers that are made without receiving adequate consideration may be deemed to be fraudulent transfers. When you file bankruptcy, a trustee may be able to reverse such a transfer and then sell the asset for the benefit of creditors.
Although each situation needs to be separately evaluated, I generally advise clients that they can satisfy two conditions. First, whether something is being sold to a friend or relative or a total stranger, make sure that reasonable value is being received in exchange for the asset. Selling at a unreasonably low amount compared to the true market value is always suspect, especially if you sell to a friend or relative. Second, be prepared to accurately show the trustee what happened to the money after you received it.
Stop Credit Card Use
Once you have met with a bankruptcy attorney, you have essentially admitted that you have financial difficulties. So, your continued use of credit cards when you are contemplating bankruptcy may come back to haunt you. It is best to avoid using your credit cards if you believe a bankruptcy is in your future.
The Bankruptcy Code contains some protections to credit card issuers. Although the details are a bit beyond this general post, the Bankruptcy Code allows a credit card issuer to possibly sue a debtor for credit card use prior to filing. The result could be that the amount you charged on the credit care just prior to filing could be deemed non-dischargeable.
Avoid Preferential Payments
Preferential payments made to insiders (friends and family members) in the 12-month period before filing bankruptcy can normally be taken back by the trustee. In addition, if you pay a creditor that is a non-insider creditor more than $600.00 within the 90-day period before filing can be taken back. If the payments are not voluntarily paid back, the trustee can actually sue for return of the money.
Realize that the trustee is not saying that your friend or relative is not owed the money. The validity of the debt is not the question. The issue is that the Bankruptcy Code does not let a debtor prefer payment to a friend or relative over a non-insider. Under the law the creditors should be treated equally and by making the preferential payment the friend or relative is being treated better.
If you think you need to file bankruptcy and would like to discuss any of the above actions to avoid or any other aspect of bankruptcy, give Bankruptcy Bodyguard, an affordable Fort Myers bankruptcy lawyer, a call. We’ll sit down with you free of charge to go over your options. Telephone number is (239) 362-2755.
