Bankruptcy is a legal remedy where you can discharge your debts or make an affordable repayment plan to pay your creditors. For most people, bankruptcy is the last option when they cannot cover their debts and the creditors keep contacting and threatening to sue them. When you file for bankruptcy, the creditors cannot legally call you to demand payment.
The moments before bankruptcy can be very challenging. Therefore, you may be tempted to use up all methods to try and save your assets. In most cases, wrongful or unnecessary actions before bankruptcy could affect your ability to receive the discharge. Therefore, if you are still trying to figure out what to do before or during bankruptcy, you must hire and retain a skilled attorney throughout the process.
Your bankruptcy lawyer can help you understand the process. Additionally, they can guide you through safe and legal ways of protecting your assets, such as using bankruptcy exemptions and filing bankruptcy under chapter 13. You must avoid the following things before bankruptcy:
Excessive Spending Before Chapter 7 Bankruptcy
Filing for bankruptcy under Chapter 7 prevents debt collectors from contacting you or threatening to sue you for the debts. Most of your unsecured debts are discharged, while the rest is paid using your liquidated assets, if any. Suspicious or excessive spending before bankruptcy can affect the outcome of your petition and leave you struggling.
Before the court discharges your debts, they will access your financial records. Any assets you purchase or money gained after the bankruptcy filing can be used to pay the debts. Your bankruptcy trustee sells anything non-exempt in a chapter 7 bankruptcy to pay the debts. Understanding how you should spend your money is vital in ensuring you qualify for chapter 7 bankruptcy.
There is more suspicion with chapter 7 bankruptcy when your spending increases several months before filing. Chapter 13 puts you on a repayment plan. Therefore, spending should be sufficient to avoid a loss to anyone. When the bankruptcy trustee reviews your finances before a bankruptcy, excessive spending may indicate fraud. Although spending money on necessities is allowed, purchasing luxury items may indicate your plan to defraud your creditors and cheat the system.
In addition to being suspicious, you could lose the large purchases you made in a liquidation bankruptcy. Therefore, it wouldn’t make sense to spend all the money on the items and not benefit from them. In most cases, the resale value of these items will be significantly lower than the original purchase.
Lying About your Assets
There are two types of bankruptcy and the eligibility criteria for either differ. Mostly liquidation bankruptcy is reserved for individuals with a low income and fewer assets. Before you file for bankruptcy under Chapter 7, you must take a means test.
The bankruptcy means test limits the use of chapter 7 bankruptcy to individuals who cannot cover their debts by testing their income level and ability to pay their secured creditors. The means test determines whether your monthly income exceeds the state's median family size income. Your income is determined by reviewing your gross income over the last six months.
If your income is lower than the median, you will automatically pass the test and there is no need for further action. The next step involves a deduction of your allowed expenses. The higher your income, the less you will likely qualify for this type of bankruptcy.
In addition to the means test, bankruptcy is a transparent process. While you can keep exempt items, your creditors have the right to recover funds from the non-exempt assets. Therefore, you must be ready to disclose all the information about your financial situation. The court will determine the amount your creditors can recover by examining your prior financial transactions.
The following are some details you must disclose when filing for bankruptcy:
- The source of your income.
- Nature of the payments you made before filing for bankruptcy.
- Gifts you have given to others before bankruptcy.
- Property transfers made preceding bankruptcy.
- Losses made from fires or other disasters.
- Transfers on financial accounts.
- Property you hold for another person.
Some people are tempted to lie about their income, assets, and expenses to qualify for liquidation bankruptcy. The bankruptcy court could dismiss your petition if you leave out some income. Additionally, you can be banned from filing. Since the bankruptcy trustee will eventually access your financial record, lying would be useless.
Failure to Consult an Attorney
Federal bankruptcy laws are complex for an average person to understand. You must follow many guidelines and information you need to know to increase your chances of a successful petition. When you learn the correct information, you can make an informed decision.
A bankruptcy attorney has all the information you need. If you are still determining the type of bankruptcy you qualify for, the lawyer will assess your income and assets to help you determine the right chapter. Additionally, they can help you find legal ways to protect your assets. When you hire and retain a skilled lawyer throughout the bankruptcy process. The lawyer will help you gather and file the correct papers with your petition.
Not Doing Proper Research
Bankruptcy allows you to discharge some of your debts or create a plan to cover them without colliding with creditors. However, you must understand that not all debts are covered in bankruptcy. Some non-dischargeable debts include:
- Fines and penalties owed to government agencies.
- Tax debt.
- Alimony and child support.
- Student loans.
- Personal injury debts arising from drunk driving accidents where a person passed away.
- Corporate housing fees.
- Debts incurred by fraud.
- Court fines and criminal restitution.
Understanding the debts you can discharge in bankruptcy allows you to decide the right chapter. Additionally, you will know what to expect out of the proceedings. Another aspect you must research before filing for bankruptcy is the pros and cons of each type of bankruptcy. Chapter 7 bankruptcy is the most common form filed in California.
The main benefit offered by this type of bankruptcy is the ability to discharge the majority of your unsecured debts. However, the bankruptcy trustee will liquidate some of your assets to pay your creditors if they are non-exempt. When you file for bankruptcy under Chapter 13, you must cover your debts through the repayment plan. However, you can keep all of your assets.
Avoid Selective Loan Repayment
If you only pay loans to relatives or friends before filing for bankruptcy, your actions may be considered a preferential transfer. When the bankruptcy trustee assesses your financial record and discovers this action, the money you paid to your friends or relatives can be taken back and distributed equally among all your creditors.
Therefore, if you have debts from different creditors, you must be careful how you repay them before you declare bankruptcy.
Running Up your Credit Card
A significant disadvantage of filing for bankruptcy is lowering your credit score. Some people may use their available credit before filing for bankruptcy. Unfortunately, such an action will catch up with you eventually. When you file for bankruptcy, your creditors are notified of the action. If upon receiving the notification, the creditors discover that you ran your credit balance before filing the petition, they can challenge the request.
This may cause you to lose the ability to discharge most or all of your debts. Mostly, any credit purchases you make up to 90 days before filing for bankruptcy may affect your case.
Avoid Giving Away your Assets
Since bankruptcy schedules require you to provide information about your assets during the filing stage, some individuals conceal them by giving them away or transferring them to family and friends. Transfer of assets to friends and family may not only cause you to lose the assets, but the court can also deny you bankruptcy relief and file criminal charges against you.
If you sold the property to pay for your basic needs during a financial crisis, you must be prepared to explain the transactions to your bankruptcy trustee.
Do Not Drain your Retirement Funds
Your retirement account is exempt in bankruptcy. Therefore, one of the unfortunate mistakes you can make before filing for bankruptcy is draining your retirement funds with the notion of protecting them. Additionally, you must refrain from withdrawing retirement funds to pay your debts. Before depleting your benefits, you can file for bankruptcy and discharge your debts or find a good way to cover them.
Avoid Rushing into Bankruptcy
Bankruptcy is one of the many options to eliminate your debts. However, not all individuals undergoing a financial crisis will receive this discharge. Legally, you can only file for chapter 13 bankruptcy and receive a discharge if you file the later case at least 4 years after the prior chapter 13. On the other hand, you can file for chapter 13 if a prior bankruptcy case was filed was a chapter 7 after six years have lapsed. One of the reasons why it is essential to wait is because you may face a more severe financial issue during the waiting time.
For example, if you are battling an illness, you may wait until your condition stabilizes before filing. After filing the petition, you could suffer a more severe problem like unemployment or foreclosure. When you cannot pay your dents, try the following debt relief methods before settling for bankruptcy:
- Debt settlement. This bankruptcy option involves negotiating with the lenders to reduce the amount you owe, work an affordable repayment plan or reduce the interest you owe for delayed payments. This could allow you to stay current on your debts and avoid bankruptcy.
- Refinancing. If your vehicle loan or mortgage is no longer affordable, you can seek a refinancing with more favorable terms, given your income or assets.
- Debt consolidation. You can seek a consolidation loan for individuals buried deep in credit card debts, medical bills, and other loans. This option allows you to reduce the loan interest and obtain more feasible repayment schedules.
- Short sales. Short sales may be your only option if you face severe financial hardships and your mortgage is underwater. A short sale involves the sale of your home for a lower cost than its value. The sale proceeds to pay the loan, and you can receive the balance.
Do not Delay filing for Bankruptcy
Although rushing into bankruptcy is not always the best choice, you should wait too long to explore the option and file the petition. For example, filing is in your best interest if you have started to suffer wage garnishment. Additionally, if one of your creditors sues you for the debt and the court has not settled the lawsuit, you can save yourself by declaring bankruptcy.
This is because if the creditor wins the case, they could look to garnish your wages and reach for your bank accounts or foreclosure. Bankruptcy offers you limited protection against any liens. Therefore, it is essential to file for bankruptcy before a lawsuit judgment. Although you can discharge your money judgments, eliminating a judgment lien in a bankruptcy proceeding is challenging. Therefore, you must contact your bankruptcy as soon as you are served with the lawsuit.
Find a Reliable Bankruptcy Lawyer Near Me
Although filing for bankruptcy may be the easiest way out of your debts, the laws around this legal proceeding are complicated. When you decide to file, you will want to do anything you can to preserve your valuable assets and discharge as much debt as possible. Unfortunately, it is easy to be misled by advice from family and friends who have limited knowledge and understanding of bankruptcy. How you act, and the steps you take before and during the bankruptcy proceeding will affect the court's ability to accept your petition and grant you bankruptcy.
Some mistakes could slow down your bankruptcy process, while others could prompt the bankruptcy court to ban you from receiving bankruptcy relief. Therefore, if you are a loved one considering bankruptcy, you will require the guidance of a skilled bankruptcy lawyer. At Sacramento Bankruptcy Lawyer, we offer expert legal advice to all our clients undergoing the bankruptcy process in Sacramento, CA. Contact us at 916-800-7690 to discuss your case.
