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What Not To Do When Filing For Bankruptcy

When you are facing an extreme financial crisis, be it from catastrophic medical issues, loss of employment, divorce, or simply crushing debt from loans and credit cards that are outpacing your income, decision-making, and judgment can suffer.

It is never a good idea to make huge life decisions when you are feeling desperate and hopeless. If you have chosen to look at bankruptcy to provide some debt relief, some hasty decisions could cost you in the long run or even invalidate your eligibility for bankruptcy altogether.

Here are some common mistakes to avoid if you are thinking about filing for bankruptcy:

  • Adding to your debt: if you already have more debt than you can pay and are considering bankruptcy, you might be thinking that you might as well put a few more things on your credit card if you aren’t going to have to pay it back. This mindset can cause huge problems because large purchases on credit within 90 days of your bankruptcy can be considered fraud and cost you the ability to file.
  • Trying to hide assets: similarly, do not try to transfer any assets immediately before you file, such as transferring a deed or giving the title of your car to a friend or relative. Even if you had no real intention to hide these assets, it could also be considered fraud if you transfer them close to your filing.
  • Paying off friends or family or any creditors before you file: you might be tempted to close out small debts or pay off any personal loans before you file, but this would be a mistake. You might be seen as giving preferential treatment to some of your creditors over others.
  • Accepting additional funds and gifts: don’t accept checks from well-meaning friends and relatives and deposit them, especially not in banks to whom you owe money. These funds will be considered when looking at payment plans and can adversely affect your position with the courts. The same goes for future income from annuities or inheritances, or tax refunds. You are better off NOT depositing these windfalls.
  • Accessing retirement or other exempt funds: it is a huge mistake to borrow against your retirement if you are under enough stress to be considering bankruptcy. While you might be thinking you should access the money before it is taken, this is a mistaken notion; retirement funds are exempt.
  • Opting for a form of bankruptcy that doesn’t fit your situation: consider carefully the causes of your financial distress and the best method to deal with your particular situation before you file. Chapters 7, 11, and 13 are vastly different in their implementation. Chapter 7 requires liquidation of non-exempt assets, whereas 11 and 13 call for extended payment plans.

Regardless of your situation, it makes sense to do research and contact a professional before you file for bankruptcy to avoid some of these costly and common mistakes. It doesn’t benefit you in the long run not to follow the advice you could get from an attorney or someone with bankruptcy experience because much of the process is counterintuitive.