Prior to speaking to a bankruptcy attorney, people often try a series of well-meaning, but ill-advised strategies. These pre-bankruptcy decisions can have negative consequences once a bankruptcy case is filed. So, if you find yourself in economic distress, DO NOT do any of the following before you speak to an experienced bankruptcy attorney:
- Pull money out of, or borrow against, a retirement account. You may be able to keep 100% of your retirement if you file bankruptcy while getting rid of all of your unsecured debt. So, paying a credit card or medical bill with your retirement can be a waste of money.
- Borrow against the equity in your House to pay unsecured debts. As in item #1, this can be, at the least, a waste of money. Also, once you tie the debt to your house, you may not be able to discharge that debt in bankruptcy without giving up your home.
- Transfer assets out of your name. If you sell, give away, or otherwise transfer any asset (especially to a relative) before filing bankruptcy, it can be viewed as a fraudulent attempt to hide an asset. This can result in a denial of your bankruptcy discharge and potential criminal prosecution. However, this is very fact-specific, some transfers won’t cause any problems while others will.
- Pay a relative back. It is common for people to ask relatives for loans when they are in trouble. It is also common for people to want to pay their relatives back before paying their other creditors. The bankruptcy code, on the other hand, is set up to see that all creditors are treated the same. So, if you repay your mom $5,000 with your tax refund and then file bankruptcy, your mom may be required to pay that $5,000 back to the Bankruptcy Court.
- Fall behind on your secured debts to pay your unsecured creditors. “Secured debts” are debts that are tied to property that can be repossessed if not paid (such as a house or a car). “Unsecured debts” are debts that are not tied to any property (such as credit card debts or medical bills). If you let a debt collector pressure you into using your house payment to pay him, then you may find yourself facing foreclosure.
Call an Experienced Bankruptcy Attorney First
Please note, this is not a complete list of all the mistakes you can make before filing bankruptcy. Also, in some cases, the items listed above will not cause any problems. The best course of action is to contact a bankruptcy attorney as soon as you see that you will not be able to pay your bills. An experienced bankruptcy attorney can advise you of your options and help you plan your next steps.