Eight Common Mistakes to Avoid When Filing for Bankruptcy
When approached correctly, bankruptcy offers individuals, couples, and businesses a chance to achieve a fresh start and regain financial stability. However, navigating this process can be tricky, and there are many errors that you may fall prey to during filing. These mistakes risk the rejection of your bankruptcy petition and can lead to substantial expenses trying to rectify them. To help ensure a smooth and successful filing, be aware of the common pitfalls and take proactive steps to avoid them.
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Things to Consider Before Filing for Bankruptcy
It’s important to approach bankruptcy with a clear understanding of what it entails and what it can cover. Not all bankruptcies are the same, and not all debts are dischargeable through bankruptcy. Debts that cannot be discharged include:
- Student Loans
- Tax Debt (less than 3 years old from assessment)
- Child Support
- Alimony Payments
Attending your bankruptcy 341 meeting is vital, as failure to do so could result in case dismissal. Remember to bring photo identification and proof of your Social Security number for verification during the meeting.
Transparency is key, and attempting to hide or give away assets that should be part of the bankruptcy estate is strongly discouraged and can be considered fraud. Bankruptcy courts actively scrutinize asset reporting, and any attempts to manipulate the system can lead to severe consequences, including petition dismissal and potential criminal charges with fines up to $500,000 and five years in prison.
It’s advisable to seek guidance from trained professionals and credit counseling services to avoid errors. Schwam-Wilcox & Associates’ Bankruptcy FAQs can be a valuable resource to address initial questions and concerns about filing for bankruptcy, providing a solid starting point to weigh the pros and cons of bankruptcy and explore alternative options for debt relief.
Eight Common Mistakes to Avoid
Seeking relief from financial stress requires careful planning, and knowing what not to do can significantly impact the success of your bankruptcy case. We cannot overstate the importance of consulting with a bankruptcy attorney if you have any uncertainties about these matters. A bankruptcy attorney will assist you to navigate the bankruptcy process more confidently.
To ensure a smoother process, avoid these eight common missteps when filing bankruptcy.
1. Filing at the wrong time
When considering bankruptcy, taking your time with the decision is crucial. Although bankruptcy offers an effective way to eliminate or reduce debt, there are limitations on how often you can receive a bankruptcy discharge. Two of the most common questions we get at Schwam-Wilcox & Associates from clients considering bankruptcy are “When is bankruptcy the right choice?” and “Can you file multiple bankruptcies?”
In Florida, you can obtain a Chapter 7 discharge once every seven years (full 84 months) or four (4) years after a chapter 13 bankruptcy filing.
Waiting might be a wise choice if you anticipate facing more severe financial issues during this waiting period, such as accumulating medical debt due to an illness or dealing with unemployment, eviction, foreclosure, or car repossession.
We advise you to wait until all monthly bills have gone through to accurately list your bank account balance(s) and apply Florida exemptions to protect those funds.
On the other hand, waiting too long to file for bankruptcy can also have adverse consequences.
If you have a wage garnishment in place, filing sooner can preserve more of your income to pay bills. Suppose a creditor has a lawsuit against you. In that case, it might be best to file for bankruptcy promptly, especially if the complaint includes a fraud allegation.
Filing before the case reaches judgment can prevent a money judgment lien, which could otherwise lead to wage garnishment, bank account attachment, car repossession, or foreclosure.
Bankruptcy offers limited protection against liens, making it crucial to act quickly and consult a bankruptcy lawyer to understand your best course of action if you have been served with a lawsuit.
2. Filing before receiving a valuable asset
Anticipating incoming substantial assets needs to be part of your timing considerations. If you expect an inheritance, a sizable income tax refund, a lawsuit settlement, or repayment of a loan you provided to someone else within the next year, it is prudent to reassess your bankruptcy decision.
Receiving these funds could alter your financial situation significantly. There may be better courses of action than filing for bankruptcy before obtaining them, as the newfound resources could be utilized to settle with creditors and alleviate your debt without bankruptcy’s necessity.
Delaying the bankruptcy filing when anticipating valuable assets could offer more flexibility and options for resolving your financial challenges.
By discussing your situation with a knowledgeable bankruptcy attorney, you can gain valuable insights into navigating your impending financial windfall and assess whether bankruptcy remains the most viable solution or if an alternative strategy utilizing the received assets might be more advantageous.
3. Using retirement funds
Many individuals view bankruptcy as a last resort and go to great lengths to avoid it, sometimes taking out home equity loans or lines of credit or withdrawing from their retirement savings to pay down debt. However, this approach is extremely risky.
Home loans secured by property may lead to foreclosure if repayment becomes unmanageable. Withdrawing retirement savings can be difficult to rebuild, often resulting in penalties for early withdrawal.
It’s important to realize that most retirement funds are protected in bankruptcy, meaning they could have been preserved during the bankruptcy process instead of being depleted to pay off debts that bankruptcy could have discharged.
Filing for bankruptcy before tapping into your retirement nest egg can lead to a much better financial outcome, providing you with the fresh start you need without compromising your long-term financial security.
4. Preparing bankruptcy paperwork carelessly or incorrectly
Bankruptcy forms require full disclosure of all assets, debt, income, expenses, and financial history. Incomplete or missing paperwork may result in the dismissal of your case or require additional filings, incurring extra fees. Any intentional misrepresentation can lead to severe consequences under penalty of perjury.
Filing for bankruptcy requires full disclosure of your financial situation, and you must report up to two (2) years’ worth of prior financial transactions on the Statement of Financial Affairs for Individuals Filing for Bankruptcy form. Some of the information you need to include with this form are:
- Sources of your prior income
- Payments made before filing for bankruptcy
- Previous and ongoing legal actions, repossessions, and foreclosures
- Gifts and contributions given to others
- Losses from theft, fire, other disasters, and gambling
- Property transfers
- Closed, sold, moved, or transferred financial accounts
- Safe-deposit boxes and storage units
- Things that you’re holding for someone else
- Any environmental issues you might know about your property
- The status of previous and ongoing businesses
A common mistake is attempting to conceal assets by leaving them out of the bankruptcy paperwork. The court scrutinizes this information to ensure creditors receive their fair share and to uncover any attempts to avoid paying debts or break bankruptcy rules. The court will likely discover any such omissions, considering it an act of fraud, subjecting you to penalties such as fines of up to $250,000.00 significant prison time, or a combination of both.
Failing to include a creditor could lead to that debt not being discharged, while omitting an asset may prompt the Chapter 7 trustee to discover it and take possession of the property.
Given the seriousness of bankruptcy fraud, it is essential to be forthright and honest throughout the process, as the Federal Bureau of Investigation (FBI) investigates such crimes.
Navigating bankruptcy requires careful attention to detail, and seeking the advice of a bankruptcy attorney can be immensely beneficial. Like those at Schwam-Wilcox & Associates, a skilled attorney can help find appropriate solutions to your financial challenges and ensure that your paperwork is completed accurately, reducing the risk of potential legal repercussions.
5. Racking up debt and taking cash advances
Avoid accumulating new debt before filing for bankruptcy. Doing so can lead to potential complications and challenges. Creditors may object to the discharge of recently incurred debt, especially for non-essential expenses, and could be considered fraudulent.
Cash advances or credit card purchases made within 70 days before filing bankruptcy, particularly for luxury items or exceeding certain amounts (e.g., over $675 for luxury goods), might be deemed “presumptive fraud” and could prevent the discharge of such debts.
Getting a cash advance within 70 days of filing for bankruptcy may render that debt ineligible for discharge during the bankruptcy process, further complicating your financial situation.
To avoid potential fraud allegations and to ensure a smooth bankruptcy process, be transparent about your financial situation and consult with a bankruptcy attorney to understand the best course of action based on your specific circumstances.
6. Moving or selling assets for less than they are worth
One of the critical aspects of filing for bankruptcy is maintaining transparency and adhering to the disclosure requirements. Moving, selling, or transferring assets before filing bankruptcy can lead to the denial of a discharge, potential criminal penalties, and more.
While some individuals may consider transferring or selling assets to avoid having them sold by the bankruptcy trustee in Chapter 7 bankruptcy, such actions are generally ineffective. The trustee will uncover and address fraudulent transfers, making them futile attempts to preserve assets.
Any property transfers or attempts to defraud the court will be uncovered, and the court will unwind such transactions, redistributing the funds to creditors.
Attempting to hide assets or putting property in someone else’s name is considered fraud in Florida, and it is unlikely that the risks involved will outweigh any perceived benefits. If you sold a property before filing for bankruptcy to cover essential expenses like rent, food, or utilities, be prepared to explain these transactions to the bankruptcy trustee and provide supporting documentation when necessary.
7. Only paying your favorite creditors
Avoid selectively repaying loans or creditors before filing for bankruptcy, as this can lead to complications and be considered a “preferential transfer.”
If you repay loans to friends, relatives, or other creditors within specific timeframes (e.g., one year for friends or relatives and 90 days for other creditors) before filing, it may be deemed a preferential transfer, and the bankruptcy trustee can initiate an adversarial proceeding to reclaim the funds and distribute them equally among all your creditors.
This means that if you paid back certain creditors, the trustee might sue them to retrieve the money, which could be a distressing situation, especially if it involves family members.
When filing for bankruptcy, you must list all your debts, including those owed to family members. Some individuals may feel embarrassed about their financial difficulties and choose to repay loans to family members before filing. However, you must treat family members and other creditors equally without preferential treatment, as required by Florida bankruptcy laws.
Additionally, after filing for bankruptcy, avoid communicating with creditors directly. Instead, entrust all correspondence with creditors to your attorney. Speaking with creditors on your own accomplishes little and could potentially harm your bankruptcy petition, undermining the process’s effectiveness.
8. Failing to file your tax returns
Failing to file income tax returns can significantly hinder your bankruptcy process and create complications if you’re required to file taxes. If you are exempt from filing tax returns, such as in cases involving disability insurance, this requirement won’t apply to your Chapter 7 bankruptcy.
However, if you are obligated to file taxes but have not done so for the two years leading up to your bankruptcy filing, it can lead to significant problems.
Your tax returns play a crucial role in assessing your current and past earnings, as well as determining your asset holdings and addressing potential priority tax claims. Without these returns, completing the required paperwork for bankruptcy, and a Chapter 13 plan (if applicable), becomes exceedingly challenging and can bring your bankruptcy proceedings to a halt.
The absence of tax returns leaves the IRS unable to assess your tax obligations, causing delays and complications in your bankruptcy case.
Before proceeding with bankruptcy, it’s essential to educate yourself on the distinctions between Chapter 7 and Chapter 13 bankruptcy. Understanding the differences will enable you to decide which chapter best suits your financial situation and goals, ensuring a more successful bankruptcy filing.
While the mistakes outlined here provide valuable insights, it’s important to remember that this is not an exhaustive list. We recommend seeking comprehensive guidance and personalized advice tailored to your specific situation from a bankruptcy attorney.
If you’re considering bankruptcy or have made some of the mentioned mistakes, don’t hesitate to contact a knowledgeable bankruptcy attorney to evaluate your circumstances thoroughly. At Schwam-Wilcox & Associates, we have extensive experience handling Chapter 7 and Chapter 13 bankruptcies in Florida, and our team is well-equipped to provide you with sound legal advice and representation.
Attempting to navigate bankruptcy with professional guidance can lead to beneficial outcomes. With the support of our skilled attorneys, you can ensure a smoother process and minimize the stress that often accompanies bankruptcy proceedings.
Contact us today for a complimentary legal consultation and let us guide you toward a fresh financial start.