What Not to do Before Filing Bankruptcy

When considering filing for bankruptcy, you must understand specific actions you should avoid, as they could complicate your case or be perceived negatively by the court. These prohibitions can vary depending on whether you're filing under Chapter 7 or Chapter 13. Here's a breakdown of what not to do before filing bankruptcy:

• Accumulating More Debt: Avoid taking on new debt just before filing. Purchases or cash advances made close to the bankruptcy filing can be seen as fraudulent, mainly if you intend to avoid repaying them.
• Paying Off Select Creditors: Paying off loans from friends or family members before other creditors can be considered preferential and unfair treatment. The trustee might reverse these payments.
• Transferring Assets: Moving assets to friends or family to hide them from the bankruptcy estate can be viewed as fraudulent. Full disclosure of all assets and liabilities is required.
• Overseas Accounts: Americans holding overseas accounts must comply with FinCEN regulations and annually disclose those accounts with their balances by filing an FBAR. California's exemption laws typically apply to assets within the US. If the trustee determines that the debtor's overseas funds are part of the bankruptcy estate, the trustee may repatriate funds to repay creditors. Failure to disclose overseas accounts by filing an FBAR will not only get you in trouble with the bankruptcy court, but FinCEN may also investigate, which could result in heavy fines or criminal prosecution.
• Large Deposits into Bank Accounts: Avoid making substantial deposits into your bank accounts that aren't regular income, such as a lump sum from the sale of assets or large transfers from others. These can raise questions about your asset disclosures or look like attempts to hide assets.
• Underestimating the Impact on Credit: Understand that bankruptcy will significantly impact your credit score and remain on your credit report for up to 10 years for Chapter 7 and 7 years for Chapter 13. Bankruptcy can affect your ability to obtain credit, insurance, or even employment in the future.
• Omitting Information or Lying: All information provided during your bankruptcy must be truthful and complete. Concealing assets, income, or debts can lead to your bankruptcy being denied.
• Ignoring Lawsuits from Creditors: If creditors have begun suing you, don't ignore these lawsuits. The outcomes could affect your bankruptcy case.
• Filing at the Incorrect Time: Bankruptcy often requires precision timing to ensure you get the best results. Debtors should especially consider timing if they have fluctuating income or a possible upcoming inheritance.
• Draining Retirement Accounts: Avoid cashing out or borrowing against your retirement accounts before filing for bankruptcy. These funds are often protected in bankruptcy, and withdrawing them can unnecessarily expose them to creditors.
• Ignoring Financial Advice: If you are considering bankruptcy, ignoring advice from a financial advisor or attorney can lead to decisions that might complicate your case. For example, they might advise against selling assets or withdrawing funds from accounts that could be protected in bankruptcy.
• Incurring New Debts for Business: If you own a business and are considering filing for bankruptcy, taking on new business debts immediately before filing can lead to accusations of fraudulent borrowing, especially if the new debts finance personal expenses.
• Filing Multiple Bankruptcy Cases: Serial filing, or repeatedly filing for bankruptcy, can be seen as an abuse of the bankruptcy system. Each filing can affect the automatic stay that prevents creditors from collecting debts and may lead to its reduction or elimination in subsequent cases. You can file bankruptcy once every eight years.
• Using Home Equity: Tapping into home equity right before a bankruptcy filing through refinancing or home equity lines of credit can create complications, as these actions may decrease the amount of equity the homestead exemption can protect.
• Engaging in Litigation: Initiating or continuing litigation can be problematic. Debtors must disclose any ongoing or upcoming lawsuits in their bankruptcy filings. Furthermore, the outcomes or the decisions to proceed with litigation could impact your bankruptcy estate.
• Stopping Mortgage Payments: Your home is a secured asset, and filing bankruptcy will not stop the bank from foreclosure if you are in arrears. If you cannot pay all your bills, discuss with your attorney which bills you should prioritize.
• Filing Bankruptcy for the sole purpose of Automatic Stay: Many debtors facing foreclosure file bankruptcy to get an automatic stay to delay the foreclosure. If you are behind on your arrears and cannot afford to catch up with your mortgage payments, an automatic stay is only temporary, and your case will be dismissed if you file in bad faith.
• Record Keeping: Keeping records of all expenses is essential if the trustee requests additional information. Debtors with special situations, such as a disabled dependent, may be able to justify expenses above the IRS Guidelines, but detailed records will be necessary.

Because most Chapter 7 cases are no-asset cases, trustees will be attentive to large purchases or financial transfers. By filing Chapter 7, you swear under oath that you do not have the financial means to repay creditors. Your unsecured debts can be discharged entirely, so you mustn't try to hide or transfer any of your assets. Before filing for Chapter 7 bankruptcy, you must pass the means test.

• Luxury Purchases: Large purchases, especially luxury items, made within 90 days before filing may not be discharged, as they might be deemed unnecessary.
• Repaying Insiders: The bankruptcy trustee can contest payments made to insiders (like relatives or business partners) within a year before filing.
• Changing Asset Structures: Converting non-exempt assets (like cash) into exempt assets (like retirement accounts) just before filing can be scrutinized and potentially reversed.

Chapter 13 is a repayment plan based on your disposable income after covering your expenses. You must be able to justify your income, and the trustee will want to ensure you can make the appropriate payments according to the plan you create.

• Failing to File Tax Returns: To qualify for Chapter 13, you must have filed your tax returns for the four years before your bankruptcy filing. You will also need to file tax returns during your bankruptcy for the entire duration of your plan.
• Inconsistent Income: Since Chapter 13 requires a steady income for the repayment plan, significant income or employment status changes can affect your eligibility or plan feasibility.

If you are considering bankruptcy, contact me to ensure you comply with state and federal laws before and during your case. With offices in San Clemente, Riverside, and Palm Desert, I serve clients in the Inland Empire and the Greater Los Angeles area. I have filed thousands of bankruptcy cases and usually personally answer your call. Call me anytime for a free consultation, and once I understand your situation, I can advise you on what not to do before filing for bankruptcy.