If you are considering filing for bankruptcy, here are 7 things you should NOT do.
1. Do not pay back money to friends or relatives. If you have borrowed money from family members or friends, now is not the time to pay them back. If you make any payments like this within one year prior to filing your petition, you must disclose those payments on your bankruptcy petition and to the trustee at your meeting of the creditors. The bankruptcy court considers these to be preferential, insider payments. That means, you are using money that could go to your other creditors to pay to people you know. It also means that the court can recover those payments from the person you paid. Imagine your mom getting a letter or call from your trustee saying she owes the court money.
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2. Do not run up your charge cards. Some people think that if they are going to file for bankruptcy anyway, they may as well charge their Christmas presents or buy the new television they've been wanting. But, that is a really bad idea. Luxury goods over $550 are not dischargeable if purchased within 90 days of your filing date. Also, if you have recently run up your charge cards before you file, the credit card company is more likely to challenge your discharge. If they can convince the court that you incurred the charges knowing that you were going to file for bankruptcy, that is considered fraud and the charges are not dischargeable. You could also face dismissal of your bankruptcy and other penalties for fraud.
3. Do not take a cash advance. Similar to running up your credit cards, cash advances taken right before you file will not be dischargeable, and you will remain liable for repaying that debt.
4. Do not get a home equity loan. People often get a home equity loan to consolidate credit card or other unsecured debt. This is a horrible idea because you are now putting your home at risk. Unsecured debts can be discharged in bankruptcy, but if you want to keep your house, you will have to continue paying the home equity loan.
5. Do not cash out your retirement account. Many people tap into their retirement accounts to try to keep up with their bills, then end up filing for bankruptcy once that is gone. Retirement accounts can be protected in bankruptcy, so there is no need to use up those funds. You will also pay income tax and penalties on the amounts withdrawn. Finally, a retirement account distribution may affect your means test. Protect your future by saving your retirement for its intended purpose.
6. Do not transfer property. Now is a bad time to transfer assets such as cars, boats, real estate, etc. If you do not receive fair market value for the transfer, it could be considered a fraudulent transfer and the trustee will go after the person who received the property to get either the asset itself or the cash value of that asset.
7. Do not ignore your problems. When you are overwhelmed by debt, it is easy to procrastinate and try to ignore the problem. But, if you do that, you are more likely to end up having your wages garnished or bank account levied. Just as importantly, most people feel great relief after filing because they no longer have the financial burdens hanging over them. So, the earlier you deal with the problem, the faster you will get relief.
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