How to Prepare Yourself for Filing Bankruptcy
While many debtors may think that bankruptcy is a last-minute, desperate measure, it can actually work to your benefit to take the time to plan out your bankruptcy in advance. The best way to prepare for bankruptcy is to undertake certain protective actions and avoid strategies that the court might deem to be fraudulent. Preparing for your bankruptcy in this manner can help you avoid dismissal and put you in the best financial position possible after your bankruptcy. You can help prepare yourself mentally for the process of bankruptcy by understanding it as thoroughly as possible before you file.
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Instructions
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Don't pay back your family members. Although it is natural to want to protect loved ones from the ordeal of bankruptcy, transferring money to "insiders" such as family members before you file bankruptcy is a red flag for the bankruptcy court. Bankruptcy law renders such payments "preferential," meaning the court has the right to take back those payments and distribute them equally among your creditors. If your family member already spent the money, they still owe the court what you paid them. If you want to pay back debt you owe family members, wait until the end of your bankruptcy case.
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Stop incurring debt. The bankruptcy court can classify certain debts as non-dischargeable, meaning you still owe them even if you get a bankruptcy discharge. Debts that you incur close to your filing date often fall into this category, particularly cash advances or luxury purchases. In general, you should wait at least 90 days after such charges before you file bankruptcy.
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Stop paying dischargeable debt. Debt such as credit card debt is usually eliminated through the process of bankruptcy, so money you pay those creditors before you file is effectively lost money.
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Organize your financial affairs. A bankruptcy petition is akin to a compendium of your financial life. In order to complete the forms efficiently and accurately, plan in advance to collect information on your income, assets, debts, and transfers of funds or property. You will also need a copy of your tax returns and your pay stubs, so collect those in advance as well.
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Understand the bankruptcy process. In addition to helping give you peace of mind by knowing what to expect, understanding the bankruptcy process will help prepare you for what your life will be like after filing. For example, if you don't qualify for Chapter 7 bankruptcy, you may have to pay creditors for five years in a Chapter 13 bankruptcy. If you do file Chapter 7, you may or may not be able to protect certain property from liquidation by your bankruptcy trustee. Knowing in advance which type of bankruptcy you qualify for will help prepare you mentally and financially for the challenges to come.
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Don't use your retirement money to pay creditors. In most states, you can protect your retirement funds from your creditors, even if you don't file bankruptcy and have a judgment against you. Paying any creditor out of your protected retirement funds is a nonsensical way to deplete your future savings without any discernible short-term benefit.
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Pay your secured creditors. If you want to keep property that you have a loan against, such as your home or your car, you must continue to pay those creditors. Even if you get a discharge of your debt, you will lose your secured property unless you continue making payments. Decide in advance of filing bankruptcy whether or not you want to keep any property you have that is secured by a loan.
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Protect your bank assets. If you bank with a company that you owe money to, that bank may have the right to take your checking and savings deposits as an offset to the money you owe them. Although the law varies from state to state on this issue, it is generally better to avoid taking chances by moving your bank funds to an institution you do not owe money to before you file bankruptcy.
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