When you finally make the decision to file for bankruptcy, it’s probably been a long time coming. For most people, there is plenty of time to gather all the necessary paperwork and get the loose ends wrapped up before you file your case in bankruptcy court.
Even if you have plenty of time to get ready for your bankruptcy filing, there are certain items you must stay away from in the months leading up to your case if you want everything to go as smoothly as possible. Here are the top 3 mistakes people make leading up to bankruptcy.
- Paying Off Loans to Family Members
You don’t want your family and friends to be harmed by your need to file for bankruptcy, so you decide to pull together all the money you have and pay them back.
Although this is understandable and may sound reasonable at the time, it can really cause problems in your bankruptcy case. Bankruptcy law prohibits transactions known as “preferences.” A preference happens when you “prefer” to pay certain creditors over others.
There is sound reasoning behind this law. In a bankruptcy, all of your creditors are supposed to be treated equally. So, if you take what money you have and pay off your aunt for that money she loaned you and your other creditors don’t get anything, the court thinks that isn’t fair to your other creditors. They have the power to go back to your aunt and ask her to return the money so that it can be divided equally among all of the creditors.
If your aunt refuses to give the money back then the bankruptcy trustee will sue her for it. The bankruptcy trustee can look back a whole year before your case was filed to see if there were any preferences made.
So while you think you might be doing your friends or family members a favor by trying to pay them first, you could actually create more stress and hassle in the long run.
- Transferring Assets Out of Your Name
Many people fear that when they file for bankruptcy that they will lose all of their assets, like your car, your home or your retirement. Some people also think it’s a good idea to get their assets out of their name prior to filing for bankruptcy.
THIS IS NOT A GOOD IDEA.
If you transfer your assets to another person and get nothing in return, and then file for bankruptcy, the trustee will again be able to go to whomever you gave your assets to and get them back, sell them, and give the money to your creditors.
The best thing to do is keep everything the way it is. Don’t take your name off of anything and don’t transfer anything unless you first talk to your bankruptcy lawyer. This leads to the next mistake….
- Not Communicating With Your Bankruptcy Lawyer
Once you have made the choice to file for bankruptcy you should hire a lawyer and keep in close communication with them before you make any kind of changes in regards to your assets, debts, or general finances.
Sometimes the things you think might not be a big deal are actually a huge deal when it comes to filing for bankruptcy (see 1 and 2 above). If you are in direct communication with your lawyer, you can avoid many of the pitfalls people often fall into once they file for bankruptcy.
With the professional planning and guidance of an experienced bankruptcy lawyer, filing bankruptcy can provide you with relief and greatly reduce your financial stress.
