Bankruptcy laws are often complex in nature and some filers make mistakes before they ever file their petition at the courthouse. Making certain mistakes may have an adverse effect on bankruptcy or even prevent someone from qualifying for bankruptcy. Some mistakes to avoid include:
Continuing to Use Credit In Bankruptcy?
Some people may make purchases with credit weeks or months before filing bankruptcy. They may also make payday advances. However, conducting these transactions may raise a negative implication regarding whether the filer is filing bankruptcy in good faith. In some situations, bankruptcy may even be considered fraudulent. In certain circumstances, a bankruptcy petition may be denied, such as if there was a recent payday loan. Even if the bankruptcy court does allow the filing, having recent debt can give creditors grounds to object.
Transferring Property In Bankruptcy?
In order to protect certain assets, some filers may transfer money or other property into the name of someone else, such as a relative, spouse or child. However, this tactic can also result in a bankruptcy fraud investigation. Furthermore, transferring property out of a person’s name may cause the filer to lose the bankruptcy protection that he or she may have retained. Individuals can file for bankruptcy even if they have assets and they may even be able to keep them but this cannot happen if the filer no longer legally owns the assets.
Selectively Paying Creditors
Many individuals approach debt as a moral obligation. As such, they may feel that a debt to a friend, relative or employer is even more important and may choose to pay off these debts before filing bankruptcy. However, selectively paying creditors can spell disaster for bankruptcy filers. The bankruptcy trustee is often given the power to sue the individual that was paid back in order to recuperate these funds for the bankruptcy estate.
Altering Other Financial Transactions
Just as a person should continue to pay debts as he or she normally would and not take any special action, he or she should not take any special action regarding deposits. This includes refraining from making deposits of funds that do not actually belong to the filer or conducting business transactions through a personal account.
Not Filing Income Tax Returns
A filer’s tax returns are critical as a source of information to complete the necessary filings with the court. They help show the filer’s current earnings and show ownership of certain assets that the bankruptcy lawyer may try to protect. Not having tax returns may result in a dismissal of the bankruptcy case.
Making a Legal Claim
Even if a filer has a legitimate legal claim against another person or entity, this claim becomes the asset of the bankruptcy estate once the bankruptcy petition is filed.
Receiving Future Payments
The bankruptcy estate also has an ownership interest in funds that are not yet in the filer’s possession but are anticipated. If a filer takes action to receive future payments like accepting a bonus from work, accepting an inheritance that will be paid in the future or filing a tax return for a refund, the bankruptcy trustee can use these funds to pay creditors.
Ignoring Collection Actions
Another critical error is allowing a home to get foreclosed or property repossessed. Once a creditor receives a judgment, it can take action to collect a debt owed, such as garnishing wages or a bank account. A bankruptcy lawyer can explain the automatic stay in a bankruptcy action that can protect a debtor from any additional collection actions by creditors.
Providing Inaccurate Information
The debtor is required to submit important financial information and filings with the court. These documents are typically submitted as sworn testimony with the threat of penalty of perjury. If a filer knowingly misrepresents information, he or she may be subject to criminal prosecution.
Not Hiring a Lawyer
Bankruptcy is a complex area of the law, which is why some lawyers focus their entire practice on this particular aspect of the law. A bankruptcy lawyer is familiar with the documents that must be submitted to the court and can help complete this information. He or she can also provide advice throughout the process so that the debtor stays informed of his or her rights and avoids making costly mistakes. When you’re experiencing financial stress, it’s tempting to do whatever it takes to alleviate the pressure. However, because you’re only entitled to receive a bankruptcy discharge the order that wipes out your debt every so often, it’s important to ask yourself whether you’re ready to file, or whether you might need to file sometime in the future. In this article, you’ll learn about issues you’ll want to consider before moving forward with a bankruptcy case.
Don’t Rush Into Bankruptcy Too Quickly
Bankruptcy works well to wipe out debt. However, you’re limited in how often you can do so. You can receive a Chapter 7 discharge:
• once every eight years, or
• six years after a Chapter 13 bankruptcy filing.
During the waiting period, you might find yourself facing an even more severe financial problem. For instance, if you’re suffering from an illness and accumulating medical debt, you’ll probably want to hold off until your illness stabilizes. Other common problems that can crop up include unemployment, an eviction, foreclosure, car repossession. If you already filed a Chapter 7 bankruptcy, you wouldn’t be able to do so again. A creditor could garnish your wages (take money out of your paycheck), levy (seize) the funds in your bank account, or take valuable property. Less effective Chapter 13 bankruptcy options would likely be available, but you’d have to have income to qualify, and you’d be required to pay all of your discretionary income the amount left over after subtracting allowed living expenses over a three to five year repayment period. Sometimes, however, it’s in your best interest to file for bankruptcy quickly. For instance, in most cases, if you have a wage garnishment in place, the sooner you file, the more money you’ll have to pay bills. Filing quickly is also a good idea when a creditor has a lawsuit against you. Your attorney will want to look at the complaint to determine whether it includes a fraud allegation. If so, if the matter goes to judgment, you probably won’t be able to wipe out the debt in bankruptcy. Also, once a creditor wins a money judgment, the lien rights that accompany it will allow the creditor to garnish your wages, attach your bank accounts, repossess your car, and foreclose on your house. But, in most cases, if you file for bankruptcy before the creditor wins the case, the bankruptcy will stop the pending lawsuit and wipe out the debt. You should be aware that bankruptcy offers limited protection against liens, so it’s usually good to file your case before the creditor receives a judgment and liens attach to your property. Because this is a complicated area, if you’ve been served with a lawsuit, you should contact a bankruptcy lawyer as soon as possible. You can also protect most retirement funds in bankruptcy. Therefore, one of the most unfortunate financial mistakes that people regularly make before filing for bankruptcy is withdrawing retirement funds to pay off debt that bankruptcy could wipe out. Before paying off bills in this manner, speak with a knowledgeable bankruptcy attorney. You’ll likely find yourself in a much better financial situation if you file for bankruptcy before depleting your nest egg.
Don’t Provide Inaccurate, Incomplete or Dishonest Information
On your bankruptcy paperwork, you’re required to provide under penalty of perjury complete and accurate information about all of your assets, debt, income, expenses and financial history. If you knowingly misrepresent your information, such as by failing to disclose an asset, you could be subject to criminal penalties, including fines of up to $250,000, twenty years in prison, or both. Also, if you don’t file all of the paperwork, the bankruptcy court might dismiss your case, or you might have to file additional papers to correct the paperwork and pay more fees. If you leave a creditor out, that debt might not get discharged. And, if you forget to include an asset, the Chapter 7 trustee might find it and take the property. The Federal Bureau of Investigation (FBI) investigates bankruptcy crimes, so bankruptcy court is not the place to be less than forthright. Most bankruptcy lawyers can solve your problem in an appropriate manner. If you’re not sure about the potential ramification of your actions, talk to a bankruptcy attorney first. If perhaps you ran up debt during the 70 to 90 days before filing bankruptcy, beware (unless it was for necessities of life, such as food, clothing, and utilities). The creditor might object to your discharge by arguing that you took out the loan without any intention of paying it back (called fraud). As a general rule, if you took out cash advances or used a credit card to buy a luxury item within 70 to 90 days of filing bankruptcy, then you’ve committed “presumptive fraud” and might not get to discharge the debt.
Don’t Move Assets
While the bankruptcy schedules ask that you provide information about assets you own (or will own), some people might be tempted to sell, transfer for safekeeping, or hide assets before filing bankruptcy. Don’t do it. If you do, you might be denied a discharge and even be subject to criminal penalties and it’s unlikely that the risk will be worth any perceived reward. Of course, you might have sold property before you filed your bankruptcy case to pay your expenses, such as your rent, food, or utilities, and doing so isn’t wrong on your part. Be prepared to explain all of your transactions, and, when appropriate, provide supporting documentation.
Bankruptcy Disclosure Requirements
Filing for bankruptcy is a transparent process. Even though you can keep (exempt) the things you’ll need to work and maintain a household, your creditors have a right to everything else. So you must agree to disclose every aspect of your financial situation in your bankruptcy paperwork before receiving the benefits of bankruptcy. One way the court ensures that creditors get their share is by examining up to ten years’ worth of prior financial transactions. Everyone who files for bankruptcy individuals and businesses alike will report previous transactions on Your Statement of Financial Affairs for Individuals Filing for Bankruptcy form and include it as part of the official paperwork filed with the clerk. (Legal professionals often refer to this as the “SOFA” form.) If the court discovers that you transferred property in an attempt to avoid paying a creditor or broke another bankruptcy rule, the court will unwind the transaction and disperse the recovered funds to the creditors. Here’s a sampling of information you’ll need to include:
• the sources of your prior income
• payments you 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, and
• the status of previous and ongoing businesses.
Once complete, you must sign a statement declaring under penalty of perjury that the information provided is accurate. Being forthright is important because any attempt to defraud the court comes with serious consequences. Specifically, the punishment for making a false statement or failing to disclose all of the property you own can be as much as 20 years in prison, a fine of up to $250,000, or both.
Don’t Selectively Repay Loans
If you pay back loans to friends or relatives within one year of filing, or even other creditors within 90 days of filing, then this may be considered a preferential transfer. A preferential transfer can be “undone” in bankruptcy. The bankruptcy trustee may file an adversarial proceeding to get the money back from the person or entity you paid, and then disburse the money in equal shares amongst all of your creditors. If you paid an ordinary creditor, then that might not matter to you. You might care, however, if the trustee sues your mom or sister to get the money back.
Don’t File When You are About to Receive Substantial Assets
You should reconsider filing bankruptcy if you are about to receive an inheritance (within one year), a significant income tax refund, a settlement from a lawsuit, or repayment of a loan you made to someone else. Why? Because once you receive the funds, you might not be bankrupt especially if you could use this money to settle with creditors and get out of debt on your own. If you find yourself in this situation, consult with a bankruptcy attorney to discuss your options.
Don’t Fail to File Income Tax Returns
If you aren’t required to file tax returns for instance, you receive disability insurance you don’t need to worry about this requirement in a Chapter 7 bankruptcy. If you’re supposed to file taxes, however, but haven’t done so for the two years before filing bankruptcy, you’ll run into problems. Your tax returns are crucial to determining your current and past earnings and asset holdings, as well as satisfying potential priority tax claims. Without your returns, completing your paperwork, and (if applicable) a Chapter 13 plan, will be next-to-impossible and will stop your bankruptcy in its tracks. For instance, there’s no way for the IRS to determine your tax obligations without a tax assessment.
Free Initial Consultation with Lawyer
It’s not a matter of if, it’s a matter of when. Legal problems come to everyone. Whether it’s your son who gets in a car wreck, your uncle who loses his job and needs to file for bankruptcy, your sister’s brother who’s getting divorced, or a grandparent that passes away without a will -all of us have legal issues and questions that arise. So when you have a law question, call Ascent Law for your free consultation (801) 676-5506. We want to help you!
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