Mistakes that people make prior to filing for bankruptcy

I often see new bankruptcy clients that have tried different ways of dealing with their credit issues prior to filing for bankruptcy. Many times these efforts have led to major mistakes prior to filing for bankruptcy protection. Below is a list of the largest mistakes I have seen from my clients prior to filing bankruptcy:

1. Taking out a second mortgage to pay credit card debts. For many people this sounds like a great idea because it instantly pays off the credit card debts. However, what the client is doing is paying off unsecured debt with the equity in their house that they have worked years for. Some might call this “robbing Peter to pay Paul’.

2. Taking out 401(k) loans to payoff debts. This is almost the same principle as the second mortgage idea. There is also additional negative consequences because you can be double -taxed by the IRS for certain 401(k) withdrawals.

3. Waiting to long wait. Six years ago I filed a Chapter 7 bankruptcy for a friend of mine. After the bankruptcy was completed, I asked him if he had any regrets. His reply was that he wish he had filed sooner instead of allowing his credit to plunge while he tried other debt relief efforts. Since then, I have recommended to potential clients that still have good credit to file while they still have good credit.

4. Transferring assets prior to filing. I cannot tell you how many potential clients have asked if they should transfer a particular asset prior to filing for bankruptcy. It is almost always a bad idea to transfer assets prior to filing bankruptcy for a few reasons. One, you have to list the transfer on your bankruptcy schedules or it could be considered fraud. Second, the Chapter 7 Trustee can undue the transfer if he wants the assets. So in many cases, if you are dealing with an asset that has equity, look at other ways of protecting the asset. In many states, the exemptions are plentiful enough to protect the asset you are worried about.

5. Paying off friends and family. This is another mistake I see potential clients make prior to filing. They payoff friends and family instead of their other creditors. This is called a preference payment and the Chapter 7 Trustee can undue this payment.

6. Using your credit cards on the eve of filing for bankruptcy. While bankruptcy can help debtors discharge their credit card debt, it can be dangerous to make big charges on your credit cards within months of your bankruptcy filing. The reason for this is this can been seen in bad faith because you are taking out the funds with no intent to ever pay the creditor back.

- Stone Law Firm