5 Biggest Mistakes to Avoid When Filing Bankruptcy.
If you or your client is contemplating bankruptcy, make sure you take the following action to avoid costly mistakes related to your bankruptcy. Steering clear of these errors will keep the debtor out of trouble and preserve the debtor’s discharge. It will also make your life much easier during and after bankruptcy.
#1 Disclose, Disclose, Disclose.
When a debtor files a bankruptcy petition, the debtor has 14 days from filing the petition by which to file her Schedules (assets, liabilities, income and expenses) and Statements of Financial Affairs (SOFA). If not all of these documents are timely, completely and accurately filed, the debtor’s case may be dismissed. No discharge relief will be granted if this happens.
Bad stuff can happen if a debtor files all required schedules but leaves out assets or income. First, those documents must be signed under penalty of perjury. Lying on them would constitute a federal crime. Second, misrepresenting material information in the schedules is grounds for denial of a debtor’s discharge. This means no debts would be discharged.
Chances are the trustee or one of your creditors will discover the omission. Don’t do it. Disclosure over concealment is the golden rule.
#2 Don’t Repay Friends or Family Shortly Before Filing.
The Bankruptcy Code says a debtor cannot “prefer” payments to some creditors over others. 11 U.S.C. § 547. Repayment of loans from friends or family within 1 year prior to filing will likely constitute a preferential payment. If it’s a bankruptcy preference, the Chapter 7 trustee would have a claim against the friend or family member that received the payment. This will cause them to get sued by the trustee seeking to claw back this money into the bankruptcy estate. Therefore, don’t make any preferential repayments to friends or family before filing. It’s a one year lookback for family members and other “insiders”. The Bankruptcy Code defines insider to include any relative of the debtor, co-owner in a business with the debtor, or relative of such co-owner. 11 U.S.C. § 101.
The better course of action is to not pay these insiders within 1 year before filing and get your discharge. There is nothing in the Bankruptcy Code that prevents the debtor from repaying any of its creditors (including family members). In fact, the Bankruptcy Code expressly allows for such voluntary repayments after discharge.
#3 Don’t Transfer Any Assets Out of Your Name.
This is an absolute “no.” The classic example is transferring your home to your family member so that title will be in the family member’s name. This type of transfer constitutes fraud, and the trustee and others will identify it, then sue you and the family member (who would be a fraudulent transferee). In addition, the debt associated with the transferred asset (and possibly other debts) would not be discharged. There is a 2 year look back for these types of transfers i.e., fraudulent transfers.
These “tricks” have been around since Queen Elizabeth (the first), and your trustee, the judge and other professionals involved in your bankruptcy proceeding have seen it all many, many times. They won’t be fooled. In fact, to help courts make a finding that a transfer is fraudulent, relevant statutes have codified certain actions as “badges of fraud”. Do do any of the following that would be classified as a “badge of fraud”: The transfer or obligation was to an insider, the debtor retained possession or control of the property transferred after the transfer, the transfer or obligation was disclosed or concealed, before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit, the transfer was of substantially all the debtor’s assets, the debtor absconded, the debtor removed or concealed assets, the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred, the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred, the transfer occurred shortly before or shortly after a substantial debt was incurred, and the debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor.”
There is an exception to this rule regarding transferring assets out of your name. It is perfectly fine to enter into an arm’s length sale of an asset to a third party who paid market value for such asset. This is ok because in such a scenario, the debtor’s assets will not be depleted as a result (asset exchanged for cash) and the debtor’s other creditors would not lose as a result of the sale.
#4 Don’t Run Up Your Credit Card After You Know You’re Going to File Bankruptcy.
This should be common sense. If you have made the decision to file bankruptcy and are soon going to file, you can’t rack up a huge credit card bill knowing your obligation to pay the bill will soon get discharged. The law does not work that way.
Getting more specific, if you’ve done one of the two things, the associated debt will not be discharged:
1) Purchase “luxury goods or services” greater than $725 within the 90 days before filing; or
2) Getting a cash advance of greater than $1000 in the 70 days before.
There is an old saying with bankruptcy. The Bankruptcy Code protects the “honest but unfortunate debtor.” Use that as your guiding principle. If you do something that is objectively dishonest, operate as if there is a rule that prohibits that conduct with severe consequences (because there is). And, if you behave dishonestly with respect to your creditors, the Bankruptcy Code will protect them, not you.
#5 Don’t Cash Out Your Retirement Before Bankruptcy.
Many people struggling with debt have the urge, perhaps because of social stigma, to do everything they can to avoid filing bankruptcy – even to the point of cashing out their retirement. Don’t do this. Bankruptcy shouldn’t be the last option. Many times it should be the first option because it is such a powerful debt relief tool. If you simply cannot afford to repay all your debt, or perhaps you can but it will cause you to be on a financial treadmill for years, leave the retirement accounts untouched and get your discharge.
Why? Because retirement accounts are exempt from bankruptcy. This means neither the bankruptcy trustee nor the debtor’s creditors can seize that account or force you to use that money pay your debtors. You want to leave bankruptcy with your debts wiped out and your retirement accounts healthy and intact.
If you avoid these 5 things, you should be on your way to a smooth bankruptcy filing process and the financial fresh start you deserve.
Attorney, Chris Chicoine
DISCLAIMER - THIS IS FOR INFORMATION PURPOSES ONLY; IT'S NOT LEGAL ADVICE. DON'T ACT OR REFRAIN FROM ACTING BECAUSE OF THIS. NO REPRESENTATIONS OR WARRANTIES OR ANY KIND ARE MADE. CONSULT AN ATTORNEY.