What Not to Do Before Filing Bankruptcy

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Bankruptcy is not a game. The courts take the rules very seriously and can file criminal charges if intentional fraud is committed. Even if they don't go that far, they can refuse to discharge a particular debt, or dismiss the entire case. So it's a good idea to plan a bankruptcy in advance of filing and find a way to reach the best possible result. This must be done, however, within the rules of the bankruptcy code. The following three acts range from the merely unfortunate to the potentially criminal.

Don't Lose Exemptions

  • Before filing, it's an excellent idea to look at the property exemptions available to you either under your state's laws or, if applicable, the federal exemptions. Most states allow generous exemptions of equity in a homestead and investments held in pensions or retirement accounts. If these funds are borrowed against or withdrawn, however, the exemption can be lost--so don't do it. Property that remains exempt will still be there after a bankruptcy. At the same time, though, don't stop making payments on property you want to keep, just limit those payments to what you can afford without borrowing more money or withdrawing from exempt equity.

Don't Abuse of Creditors

  • One of the worse things you can do before filing bankruptcy is run up a bunch of credit card debt assuming it will be discharged in bankruptcy. First, Chapter 13 does not discharge credit card debt, and second, even under Chapter 7, the bankruptcy court will refuse to discharge abusive spending or luxury purchases immediately prior to bankruptcy. The bankruptcy reform act of 2005 lowered the threshold on luxury purchases to $500 and extended the abuse period to 90 days prior to filing. Once you enter that 90-day period, assume that every purchase will be examined. If abuse is suspected, or a luxury item purchased, discharge of this debt will be denied.

Don't Hide Property

  • It's bad enough if the court refuses to discharge a debt because it's deemed abusive. It's even worse if the court dismisses your entire case, or charges you with fraud, because you hid property from the bankruptcy trustee. Don't start giving property away or putting it in other people's name to avoid having to list it on your bankruptcy statements. If you owe money to a family member or business partner, any payment you make to them over $600 in the year preceding your bankruptcy is deemed a "preference" and can be recovered from them by the trustee. The same is true of property transfers. The point of bankruptcy is to distribute property fairly--and legally--among your creditors. Giving everything away to friends and family is appropriately deemed to be defrauding the other creditors.

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