What to Avoid Before Filing Bankruptcy
Doing certain things before you file bankruptcy can result in problems with your case. For example, creditors can object to the discharge of their debt if you had no intention of repaying the debt when you obtained it. Therefore, it’s important to stop using credit cards as soon as you decide to file bankruptcy. If you decide to file bankruptcy and continue to use your credit cards, one or more creditors might believe that you are committing fraud by filing bankruptcy. If the court agrees, you will have repay the debt.
Another problem may arise if you sell or transfer property before filing bankruptcy. If you are concerned about keeping your home or other property, do not suddenly give it away to a friend or relative. Also, speak with a bankruptcy attorney before you even think about selling any property. Sales or other transfers can be considered to be fraudulent if done shortly before a bankrupcy filing. Bankruptcy trustees are especially suspicious of transfers to relatives for less than the full value. If you gave away something to a relative within the past year, the trustee can cancel the transfer, recover the property, and sell it to get money for your creditors.
In the same way, bankruptcy courts look at payments to creditors made before the bankruptcy filing. If you paid more than $600 to a creditor during the 90 days before filing bankruptcy, you must disclose the payment in your bankruptcy paperwork. You must also disclose loan payments made to relatives within one year prior to filing the bankruptcy. The trustee may believe that you are showing favoritism or a preference to the creditors or relatives by making the payments. They can recover the payments from the preferred creditor so that all of your creditors can share in the money. (You’re allowed to make your regular mortgage and car payments so don’t worry about those.)
Prior to filing bankruptcy, you should also avoid withdrawing money from an IRA, 401K or other ERISA qualified retirement plan. Funds in those plans are protected from your creditors and the bankruptcy court, but if you remove the money and put it in your bank account, it is no longer protected. Also, if you use some of the money to make large payments to some of your creditors, it may be a preference as described above.