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This article will discuss what to avoid in the months leading up to filing for bankruptcy so that you don’t inadvertently commit fraud or get your bankruptcy discharge denied. We will cover the following topics:

 

  • Paying off loans before filing for bankruptcy
  • Selling retirement assets before filing for bankruptcy
  • Racking up new debt before filing for bankruptcy
  • Selling assets below market value before filing for bankruptcy
  • Moving or sheltering assets before filing for bankruptcy
  • File bankruptcy before receiving a large sum of money
  • Failing to file income tax returns before filing for bankruptcy

This article will discuss what to avoid in the months leading up to filing for bankruptcy so that you don’t inadvertently commit fraud or get your bankruptcy discharge denied. We will cover the following topics:

 

  • Paying off loans before filing for bankruptcy
  • Selling retirement assets before filing for bankruptcy
  • Racking up new debt before filing for bankruptcy
  • Selling assets below market value before filing for bankruptcy
  • Moving or sheltering assets before filing for bankruptcy
  • File bankruptcy before receiving a large sum of money
  • Failing to file income tax returns before filing for bankruptcy

 

Going through bankruptcy is stressful enough, but when you think you’re doing something perfectly legal like paying down debt to a family member, the wrong decision can raise red flags and place your bankruptcy discharge in jeopardy. Below are some of the more common mistakes people make before filing for bankruptcy.

This article discusses general things you should not do on an individual level when filing for bankruptcy. For more information on specific instances and how to file bankruptcy for a business, read our article about How To Avoid Filing For Bankruptcy in Bad Faith.

Paying Off Loans Before Filing For Bankruptcy

 

Most people would be surprised to learn that, in general, you don’t want to pay off your loans before filing bankruptcy. For loans or debts owed to a family member, payments made as far as two years before filing for bankruptcy can be recaptured; these are called “preferential transfers.” Obviously, if the friend or family member already spent the money you paid back, it can have devastating consequences. The bankruptcy trustee must apply the Bankruptcy Code objectively when considering adversarial proceedings. Despite the financial status of the friend or family you paid back, the trustee can recapture the funds. Trying to give the money away instead of calling it a loan repayment is even worse and might cause the trustee to investigate you for fraud.

 

Other loans such as car loans and unsecured debt don’t need to be paid off if you’ll be filing for bankruptcy. Non-priority unsecured debt will be discharged, so paying it off ahead of bankruptcy is pointless, and if you pay a car loan down, thinking you will get to keep it after the bankruptcy, think again. The more equity you have in an asset like a vehicle, the more likely the trustee will order the asset sold to cover your creditors. Bottom line, if you’re heading for bankruptcy, speak with an attorney about what you should and should not be paying.

 Learn more about how your mortgage is impacted by filing for bankruptcy here.

Selling Retirement Assets Before Filing For Bankruptcy

 

Most retirement accounts are exempt from bankruptcy. Taking money out of an IRA or 401(k) to pay down debts when you’re likely headed for bankruptcy anyway is a surefire way to waste money and set you up for more issues down the road. Many people see bankruptcy as a last resort financial option that will leave them destitute. However, bankruptcy is a useful tool for individuals and businesses that find themselves in extended negative financial situations. Before you deplete your life savings, speak with a bankruptcy attorney about your options.

 

Racking Up New Debt Before Filing For Bankruptcy

 

Too many people make the mistake of thinking, “I’m filing for bankruptcy anyway; I might as well spend some extra money.” Not only can the bankruptcy trustee repossess that new item you just bought, but they can also charge you with “presumptive fraud.” Any new purchases or debt acquired for life necessities, such as housing, utilities, food, and clothing, are fine with reason, but cash advances or luxury item purchases are sure to land you in legal trouble. Bankruptcy is not a quick pass to take a last-minute vacation or buy that car you’ve always wanted.

 

Selling Assets Below Market Value Before Filing For Bankruptcy

 

Attempting to shed assets by selling them to friends, family members, or whomever before filing for bankruptcy is a bad idea, especially if you do it before market value. The bankruptcy trustee will comb through EVERYTHING. If you thought you were clever by having your brother buy your beach condo so you could obtain the property later, think again. Any item sold or unloaded within a period before the bankruptcy (depends on the state, but usually two years) has the potential to be recaptured back into the bankruptcy estate. If the debtor tries to lie about or hide the sale and the trustee finds out, they could face bankruptcy fraud charges.

 

Moving or Sheltering Assets Before Filing For Bankruptcy

 

It should go without saying that trying to transfer or hide assets before petitioning for bankruptcy is illegal. However, many people still do it because they don’t understand that once they file bankruptcy, that diamond ring or that 100-inch OLED TV isn’t theirs anymore. At a minimum, sheltering or transferring assets from bankruptcy will lead to dismissal of the case, being barred from applying for bankruptcy in the future, and possible criminal charges. Bottom line, if you really want to keep the fancy car or the nice painting, opt for a Chapter 13 bankruptcy.

 

File Bankruptcy Before Receiving a Large Sum of Money

 

Not a lot of people expect to come into money when considering bankruptcy. Whether entirely by chance, such as the untimely death of a relative and subsequent inheritance or expected, if someone receives a large sum of money within 180 days of the bankruptcy, that money is considered part of the estate. If you didn’t see it coming, there’s really nothing you can do about it. But if you know that you’re going to receive a large sum of money, you can try to time your bankruptcy around it or take the money and avoid bankruptcy. If you’re in this situation, speak to an attorney.

 

Failing to File Income Tax Returns Before Filing For Bankruptcy

 

Being in a poor financial situation is no excuse not to file your tax returns. But, if you plan to file for bankruptcy and haven’t filed taxes for at least two years, prepare for a serious headache. Your tax returns provide your current and past earnings and asset holdings, as well as any potential priority tax claims. Without tax returns, filing for Chapter 13 bankruptcy will be nearly impossible and make Chapter 7 a real nightmare. If you know this will be an issue going into your bankruptcy, try to collect as much of your financial information as possible to fill the gaps. Read more about the differences between a Chapter 7 and a Chapter 13 Bankruptcy here.

 

If you have additional questions about filing for bankruptcy, check out our Bankruptcy FAQs article or give us a call at (630)-324-6666 to get in touch with one of our skilled bankruptcy attorneys.


Posted 
March 27, 2021
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