Mistakes to Avoid When Filing Bankruptcy
1. Getting a Home Equity Loan To Pay Bills Instead of Filing Bankruptcy – Your house is not an ATM, and you can’t borrow your way out of debt. Many people put off the inevitable by getting a home equity loan to pay off credit cards, then they end up losing their home when they cannot afford the home equity loan payments. If you don’t pay your credit cards, the creditors harass you. If you don’t pay your home equity loan, you lose your house. So, before you get a home equity loan, you should learn how bankruptcy might be able to help you.
2. Getting A Retirement Loan or Cashing In An IRA Instead Of Filing Bankruptcy – Many people put off the inevitable by borrowing from a 401(k) or cashing out their IRA in order to pay credit cards. You are not required to do that. It is better to address the underlying problem and save your retirement, because Social Security may not be around when you need it. If it is around, you certainly will not receive enough to live on comfortably. So, before you reach for retirement funds, you should learn how bankruptcy might benefit you.
3. Waiting Too Long – It is human nature to put off unpleasant events. Foreclosure, repossession and other collection efforts can often be stopped by filing bankruptcy. Further, you may meet with me for a consultation and that time your income qualifies you to file a Chapter 7. Then you may wait a year to file, and your income increased during that year, and you may no longer qualify to file a Chapter 7. The same goes for the value of your house. I've seen clients meet with me one year and they only have about $30,000-$40,000 equity in their house, and they would've been fine to file a Chapter 7. Then they come back 2 or 3 years later, and during that time their home value skyrocketed, and they simply have too much equity to file a Chapter 7 and keep their house. In a case like that, the only option is to do a Chapter 13 to keep their house, while paying back their unsecured creditors some funds in the Chapter 13 plan, in order to keep the house.
4. Reaffirming Burdensome Debt – You can reaffirm (keep) any of your secured debts (if you are current on them at the time of signing the reaffirmation agreement). Do not reaffirm debts that are unreasonable. Doing so will make it difficult or impossible for you to recover financially.
5. Having Too Much Cash – You are limited on how much cash you can protect in a bankruptcy case, but determining just how much cash you can protect requires a review of several factors. That’s the purpose of a Free Initial Consultation.
6. Large Credit Card Usage In The Two Years Before Filing Bankruptcy – Significant cash advances, balance transfers or purchases in the 24 months before filing will be a reason for choosing a Chapter 13 bankruptcy over a Chapter 7 bankruptcy. The issue is whether or not you were incurring the debt at a time that you could not afford to repay it. If the credit card company can show that, then you may be stuck with that credit card debt in Chapter 7. The most important look back period is the 90 days prior to filing bankruptcy. You should discuss this with your attorney.
7. Repaying Family Members, Friends or Business Partners Before Filing – In a Chapter 7, these payments are considered “preferences” and can be demanded back by the Trustee, then distributed to creditors on a pro-rata basis. If the Chapter 7 trustee cannot recover those preferences, then he can use that as a basis for objecting to your discharge, which then forces you to come up with the money. Essentially, you will pay the debt twice. So, don’t do it. In a Chapter 13, all it does is increase the monthly plan payment. If you've paid back family members or friends in the 12 months prior to filing bankruptcy, be sure to discuss this with your attorney.
8. Transferring Assets – Assets transferred in anticipation of filing bankruptcy may be recovered by the Trustee in a Chapter 7 as a fraudulent transfer. In a Chapter 13, it would cause your plan payment to increase. Besides, you can protect your stuff while it’s in your possession or control, but not after you have given it to someone. Before transferring anything of substantial value, be sure to consult with your attorney.
9. Expecting An Inheritance – Property inherited within 6 months after filing bankruptcy is deemed to be part of the bankruptcy estate. If you expect an inheritance, make sure that you discuss this with your attorney.
10. Intending On Selling Your House Before Your Bankruptcy Case Is Over – This is only an issue in a Chapter 13 case because it lasts 3-5 years, whereas a Chapter 7 only lasts about 3-4 months. We can protect your home equity in a bankruptcy case, but your attempt to sell it for maximum profit during your bankruptcy case can be difficult, especially if you want to keep all the net proceeds. Be sure to let your attorney know that you intend to sell your house before your case is over.
11. Missing The Hearing – If you do not attend your hearing (also known as the 341 Meeting of Creditors), then your case may be dismissed. You must bring to the meeting a photo ID and proof of your Social Security number.
Anything you do shortly before filing bankruptcy is looked at closely. Discuss any concerns related to the above issues with your attorney. If you think that you have made one or more of the mistakes, then make sure that we know about it, as most can be corrected.
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