After meeting with several hundred clients over the years, lawyers often see common issues in bankruptcy cases. Though some of these are more serious than others are, all may have a substantial effect on the outcome of a case. Below are some things to do (and some to avoid) before filing for Chapter 7 bankruptcy protection.
Don’t Disregard Bankruptcy as an Option
Unfortunately, there are numerous misconceptions surrounding the process of consumer bankruptcy. Some people are reluctant to file because they believe their credit will be affected forever or they will lose everything they own. However, these are little more than common myths. It’s important to not rule out Chapter 7 until you’ve received some legal advice.
Don’t File an Unnecessary Bankruptcy
Although a Chapter 7 filing is an effective way for some to discharge their debts and get a fresh financial start, it’s not right for every person and every situation. Certain debts, such as student loans and child support, cannot be discharged, which is why it’s vital to determine whether Chapter 7 is appropriate. Consult an attorney to learn about your legal options.
Speak to an Attorney As Soon As Possible
Even if you’re not yet ready to file, consulting a knowledgeable and experienced bankruptcy attorney will give you the guidance you need to make informed decisions. To determine whether you’re working with the right lawyer, ask them about their other practice areas, how long they’ve been practicing bankruptcy law, how many cases they’ve filed, to name the jurisdiction’s trustees, and to outline each trustee’s documentation requirements.
If the attorney can’t provide this information, it’s likely that they don’t file bankruptcy cases on a regular basis. One of the most common issues lawyers face is meeting with prospective clients when it’s too late. If you’ve received a summons and a complaint, or if the IRS has notified you that they’re going to garnish your wages, it’s crucial to get legal representation immediately.
File Under the Correct Chapter
There are two different types of bankruptcy consumers can use to address their debts: Chapter 7 and Chapter 13. While Chapter 7 is best for those whose income falls below a certain threshold, Chapter 13 or ‘reorganization bankruptcy’ is appropriate for filers who cannot get Chapter 7.
Go Over Your Monthly Bills
Every consumer bankruptcy petition involves Schedule J. This form is an estimate of the household’s projected or average monthly expenses at the time of filing. Before setting up a consultation with an attorney, take some time to review your bank statements and learn about your spending habits. This helps to determine whether you have sufficient disposable income available to your creditors.
File Your Tax Returns
The 2005 BAPCPA (Bankruptcy Abuse Prevention and Consumer Protection Act) set forth new rules on the filing of bankruptcies and tax returns. If you file, you’ll have to provide the previous year’s tax return, as well as the current year’s if it’s requested. If you don’t file your return that’s due after filing for bankruptcy, the Internal Revenue Service may request that your case be dismissed.
Document and Review 1099 and Self-Employment Income
If you receive 1099 funds or you’re self-employed, it’s vital that you know your income and expenses for the six-month period before filing for Chapter 7 bankruptcy. The bankruptcy means test uses a six-month average to determine the availability of disposable income. It’s time-consuming to calculate your take-home pay when you receive 1099 income or are self-employed, but it’s a vital step in the bankruptcy filing process.
Save Each Month’s Proof of Income or Pay Stub
The aforementioned BAPCPA made substantial changes to the bankruptcy code, with one of the most notable being the creation of the means test. This test is based on national and local standards for common expenses, and it uses a half-year average that’s extrapolated to a full year. To pass the means test, you’ll need the past six months of income proof or pay statements.
File the Proper Paperwork
Bankruptcy is a time-consuming and complicated process. There are many forms to fill out and documents to submit, including tax returns, pay stubs, and bank statements. If the right documents aren’t submitted on time, your case may be dismissed. For this and other reasons, hiring an attorney is important.
Don’t Take Cash Advances on Your Credit Cards
Taking cash advances right before filing for Chapter 7 bankruptcy may present serious issues for various reasons. Of course, it’s dependent on the circumstances, but if you take a $10,000 advance on a credit card the week before filing for bankruptcy, you’ll likely hear from the credit card company first when you file. In many cases, creditors end up taking adverse actions on the grounds of fraud.
Don’t Use Your Cards At All
Another common complication in consumer bankruptcy cases is the usage of credit immediately before filing for Chapter 7. The issue is that, to the creditor, using credit right before filing for bankruptcy proves that you never planned to repay the debt. If you can’t pay your bills when they’re due, how is it possible to accrue more debt? If your financial situation is so bad that you cannot afford to make monthly payments to your creditors, do yourself a favor and stop using your credit cards before filing for bankruptcy protection.
Don’t Trade an Unsecured Debt for a Secured Debt
Before filing for Chapter 7, don’t take out a second mortgage or a home equity loan to settle payday loans, credit card bills, and other unsecured debts. Under the rules of Chapter 7, most of these debts will be discharged. However, once you’ve used your home as collateral, you risk losing it if you fail to make timely payments.
Don’t Put Assets and Money in Others’ Names
It may not seem like a big deal to transfer a car title to a family member or friend ahead of a bankruptcy filing, but it really is. Transferring assets to others to minimize them is prohibited. Each transfer must be disclosed to the court, and the failure to do so will complicate the case. When you’re filing for Chapter 7 bankruptcy, the goal is to discharge every debt possible. Transferring title to an asset to keep it out of the trustee’s hands will jeopardize your case, and you may lose your right to a debt discharge.
Don’t Borrow Money or Take Early Withdrawals from a 401(k) or IRA
Chapter 7 bankruptcy provides certain exemptions that protect retirement funds and other assets. Lawyers often meet with clients who have mistakenly withdrawn or borrowed from retirement funds in order to pay their debts. It’s crucial to weigh the benefits and drawbacks before borrowing from a retirement account. Remember, bankruptcy provides exemptions that protect the average debtor’s retirement accounts. It’s possible to file for bankruptcy and still live comfortably in retirement.
Disclose All Assets, Expenses, and Income Sources
Anyone filing for Chapter 7 bankruptcy must disclose all their assets, income, and expenses. The automatic stay is the core of the consumer bankruptcy process, but it’s equally important to treat creditors according to the nature of the debt and the priority of payment under the US bankruptcy code. As a filer, it’s your job to be honest and open about your assets, income, and debts in return for the discharge of your eligible debt. If you fail to disclose it all, you might not just lose your right to a debt discharge; you may face criminal charges as well.
Don’t Pay Your Creditors
Most people want to do the right thing by paying off certain debts before filing for Chapter 7. For instance, they may want to pay a child’s auto loan for which they’ve co-signed, or they want to pay down the balance on a credit card. However, such transactions are prohibited.
It is acceptable to pay bills as you normally would. If you incur a $200 balance on a credit card, you can certainly pay it the next month. However, you can’t make an extraordinary payment to fully satisfy an obligation. These payments are known as preferential transfers, which may lead to ‘clawback’ lawsuits. Here, the bankruptcy trustee sues the person or company you paid, to reclaim the funds and include them in the bankruptcy estate.
Don’t Make Big Bank Deposits
Before filing for Chapter 7, don’t deposit money (other than wages) into your bank account. A good example would be making a deposit as a favor to a friend. If you’re a small business owner, do not conduct business transactions through your personal account.
Don’t File any Lawsuits
Any pending legal claim is considered an asset, and as such, it’s subject to seizure by the bankruptcy court. This applies equally to unresolved cases and those with undetermined settlement amounts. In fact, even if you have a claim against someone and you haven’t yet filed it, that claim is included in the bankruptcy estate. If you have a potential legal claim, consult an attorney before your Chapter 7 filing.
Rethink Actions That May Result in Further Payments
Funds that aren’t in your possession, but are expected to be in the future, are included in the bankruptcy estate. In the event of a Chapter 7 filing, the court-appointed trustee may take those funds and use them to pay unsecured debts. Examples include accepting future bonuses at work, taking an annuity, and filing tax returns with expected refunds. If you are to receive any funds in the future, it’s a good idea to consult a bankruptcy lawyer.
Don’t File Too Soon After a Previous Bankruptcy
One significant mistake to avoid in a Chapter 7 case is improper timing. The rule is that, if you’ve filed in the past and had your debts discharged, you have to wait a full eight years before filing once more. A Chapter 7 filing within the past eight years doesn’t prevent you from filing a different type of bankruptcy. An experienced lawyer can help you find out whether you’re eligible for the fresh start Chapter 7 provides.
Use Exemptions Wisely
When requesting Chapter 7 bankruptcy protection, you’re allowed to exempt some of your personal property. While some jurisdictions allow filers to choose between state and federal exemptions, others require them to use the state’s exemption list. In any case, it’s essential to understand how exemptions work, as it may make the difference between losing and keeping an asset.
Appear at Every Court Proceeding
If there’s a collections case pending in federal or state court, don’t assume that you can avoid the process just because you’ve chosen to file for bankruptcy protection. Until the case has been filed, collection activities continue. Before and during a bankruptcy, it’s important to attend scheduled court hearings.
Go Through Credit Counseling
Before filing for bankruptcy, you must complete an approved credit counseling course within 180 days. When your case is submitted to the court, you’ll have to provide proof of completion; the failure to do so may result in the dismissal of your case. After filing, you’ll also have to take (and finish) a debtor’s education course.
Waiting for a Filing
Most of the mistakes mentioned here may be avoided by waiting to file for Chapter 7 bankruptcy protection. There’s a ‘look back’ period for most transaction types, which means that the court only considers transactions made within a certain period before filing. By delaying your Chapter 7 filing until the period has elapsed, you may avoid some serious issues.
A Few Closing Thoughts
If you are considering filing for Chapter 7 bankruptcy, numerous financial decisions may affect your case, whether or not they’re intentional and even if you haven’t yet decided to file. It is usually best to work with an attorney when planning a bankruptcy. Even before doing so, it’s crucial to take certain actions and avoid mistakes. By doing so, you’ll prevent challenges by the trustee and your creditors, and you’ll also ensure a smooth bankruptcy filing. If you have questions or concerns about the bankruptcy process, don’t hesitate to schedule an initial consultation with an attorney.
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