Prefiling Mistakes That Can Derail Your Bankruptcy Case
Bankruptcy, whether it be in the form of a Chapter 7 liquidation or a Chapter 13 debt reorganization, can provide a fresh start for individuals struggling with overwhelming debt. However, there are several errors debtors commonly make prior to filing their petition that can jeopardize the success of their case as well as trigger other negative legal consequences.
Once you have decided to proceed with filing for bankruptcy, these actions should be carefully avoided:
- Transferring money or property — Shifting ownership of assets to friends or family members, for no money or for a price well below market value, may be deemed a fraudulent conveyance intended to hide assets from creditors and from the bankruptcy court. Such a finding can lead to serious consequences, including the denial of debt discharge and even the filing of criminal charges.
- Giving assets to family members — Gifts of money or property to family or friends with the intention of getting the assets back after bankruptcy can be considered fraudulent conveyances, and they can be voided by the trustee.
- Paying back debts selectively — The trustee will look back at any payments you made within 90 days to a year before filing for bankruptcy. Paying back certain creditors but not others can be deemed preferential transfers that are unfair to creditors left in the lurch. These payments can be voided by the trustee, who can require that the money be returned and divided among all eligible creditors.
- Taking on new credit card debt — Consumers sometimes borrow heavily in the expectation that the debts will be discharged through bankruptcy. But credit card purchases of expensive luxury items made within 90 days prior to filing the bankruptcy petition are presumed to be fraudulent. The credit card company can likely block discharge of the debt.
- Raiding retirement accounts: — Most retirement accounts, such as 401(k)s, IRAs and Keogh plans, are protected from creditors in bankruptcy, so withdrawing assets to pay off debts serves no purpose. The same is true of pensions, deferred compensation and certain other plans.
- Lying about your assets — Chapter 7 bankruptcy imposes a “means test’’ designed to determine eligibility for this relief. The test requires that you disclose all of your assets and income to show whether there are any resources that can be devoted to paying back creditors. Deliberately leaving out assets or understating their value can result in your petition being dismissed, and you may be banned from filing a future bankruptcy to discharge the same debts.
- Not seeking legal counsel — Bankruptcy law is complex. A knowledgeable bankruptcy attorney can help you avoid pitfalls, navigate the process and make informed decisions to maximize the benefits. Your attorney can also recommend positive actions in preparation for your case.
At the Law Offices of Michael Jay Berger in Beverly Hills, I provide a wide range of legal services for individuals and families suffering from excessive debt. Call me at 310-271-6223 or contact me online to schedule a free consultation.