Bankruptcy often comes with a negative social stigma, but bankruptcy is not a moral choice. Bankruptcy is an important financial planning tool that allows debtors a legal option to get out of a desperate situation. Studies by the Federal Reserve Bank of New York have shown that people in debt who file for bankruptcy do better financially than those who do not. So declaring for bankruptcy can be a great way to get back on track; however, there are some things that a person in debt should not do before declaring bankruptcy.
Do not create new debt.
If you plan on filing for bankruptcy, try to avoid creating new debt. The consequences of creating new debt can be severe, as a new creditor can claim the debtor took out a new loan, opened a credit card, or acquired a new debt without the intent of paying it back. A creditor could argue this is fraud because the debtor never intended to pay it back. If the court agrees the act was fraudulent, the debt will not be discharged in bankruptcy and the debtor will still owe the whole debt.
Do not pay creditors
We recommend that if you are seriously considering bankruptcy not to make any big or abnormal payments. Even thought it seems like a debtor should try and pay as much money back to creditors as possible, it can actually cause problems for the bankruptcy later. This is because the courts do not allow preferential payments, or payments that favor one creditor over another. For instance, if a debtor owes his brother a $10,000 loan it is more likely that the debtor would wish to pay this person back before declaring bankruptcy so his brother can receive the full amount owed. However, allowing a debtor to pick and choose who he or she pays back in full is inherently unfair to the other creditors. If a debtor tries to pay back one creditor over the others, the court will take this money from the creditor and put it back in the bankruptcy estate.
Do not hide information.
When a debtor files for bankruptcy, he or she must provide full and complete information on their bankruptcy petition. Any debts, accounts, assets, and other financial information must be provided. Any information intentionally left off the petition could be considered fraud. Fraud is a serious accusation that can result in the debtor not being able to discharge their debts and cause him or her to even face criminal charges.
Do not file if you are about to receive a large inheritance.
Debtors who are about to receive a large inheritance usually should not file for bankruptcy. Bankruptcy can be a great tool to get out of debt, but also has some consequences such as lowering a person’s credit score for a long period of time. Therefore, if a person can resolve his or her financial situation without declaring bankruptcy it may be preferential. If someone does receive an inheritance and decides to go through with a bankruptcy, the bankruptcy estate can seize the inheritance to be distributed to the creditors.
Keep paying routine bills.
We recommend that a debtor continue to keep paying routine bills like gas and electricity. Try to avoid making any payments that would not be considered routine payments unless they are absolutely necessary. This means do not try to purchase luxury goods or transfer assets to a relative in the hopes the court won’t take the money. For instance, a court would consider buying a new car two months before declaring bankruptcy fraudulent. Transferring title of a car to a brother two months before bankruptcy would also be considered fraudulent.
Do not drain retirement funds.
Most states allow debtors to keep their retirement funds even if they file a chapter 7 bankruptcy. This means that most retirement accounts like an IRA and 401K are safe from the bankruptcy trustee. We recommend a debtor not drain these funds to try and catch up on debts if the situation looks hopeless. The big exception to this rule is that an inherited IRA may not be exempt from a bankruptcy.
For more information on how to prepare for a chapter 7 or chapter 13 bankruptcy in Florida, contact the Law Office of David M. Goldman PLLC at 904-681-1200.