Friday, December 23, 2011
Three Bad Bankruptcy Mistakes Before Filing Bankruptcy
Three Bad Bankruptcy Mistakes Before Filing Bankruptcy
The bankruptcy laws
are confusing and complicated. Fortunately Congress and the US Supreme Court
have given us a guidepost by stating that the bankruptcy laws exist to help
debtors who are poor and honest. The bankruptcy trustee will
investigate your case to determine whether you are both poor and honest. Excess
money or equity in property can be taken to pay creditors, and efforts to hide
money or assets will be punished. With this in mind, here are three bad
mistakes you can make before filing bankruptcy:
Mistake #1: Cashing Retirement Funds
Most retirement funds are fully protected from
creditors and the bankruptcy court. That means if you file bankruptcy, you keep
your retirement money. Congress wants you to have money for your retirement.
Along with the obvious problems associated with
losing your future retirement money, cashing out retirement funds is also huge
mistake because (1) your attorney may no longer be able to protect available
retirement money converted into cash; and (2) in some cases the money you pay
on a loan may be recoverable by the bankruptcy trustee. Money paid to creditors
before bankruptcy does not improve your financial situation or help you recover
from bankruptcy. Always discuss cashing out 401(k) or IRA retirement funds with
your attorney prior to your filing bankruptcy.
Mistake #2: Transferring Property for Less Than Full Value
Anytime an individual transfers property for
less than full value, the transfer seems “suspicious.” This is especially true
when the transfer occurs just before a bankruptcy filing. The bankruptcy
trustee scrutinizes all property transfers before bankruptcy, and if a property
transfer was not a fair and honest exchange, the trustee may avoid the transfer
and get the property back.
One common bankruptcy mistake is transferring
property to a friend or family member in an effort to hide it from the
bankruptcy court. This is a very bad mistake that can result in: (1) losing the
property anyway; (2) denial of your bankruptcy discharge; and/or (3) criminal
prosecution for bankruptcy fraud. If you need to sell or transfer property
before your bankruptcy, contact an experienced attorney and discuss your
options!
Mistake
#4: Paying Off
Loans
When a debtor pays off
a loan before bankruptcy, the trustee becomes very interested in your case.
First, if you paid a large sum of money to one creditor just before filing, the
trustee may ask the creditor to return the money. Second, paying off an unsecured creditor that is otherwise
dischargeable (like a credit card or payday loan) is like throwing your money
away. You need that money to help rebuild your finances.
Finally, paying off
secured property could create too much non-exemptible equity. The bankruptcy
laws allow you to keep property up to a certain amount. The protected amount is
determined by taking the fair market value of the property minus any secured
loans. When you pay off the loans, you increase your equity in the property
which may exceed the amount you are allowed to keep. When that happens the
bankruptcy trustee may ask you for the property or the cash difference between
the equity and the exemption amount. Bottom line: don’t pay off loans before
bankruptcy!
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