This post is the second of a two-part series. You can read Part One here: Considering Bankruptcy? Mistakes to Avoid Part One.
Part One discussed mistakes people make when trying to avoid bankruptcy or postponing the decision of whether or not to file.
Once you have decided to file, there are additional issues to carefully consider.
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Mistake 1: Keeping checking or savings accounts at banks where you owe money
Let’s say you have a personal loan from the same bank that holds your checking account.
Even before you file bankruptcy, a bank can sometimes take money from your checking account to pay the loan if it goes into default. The bank can do this without giving you notice. This is called the right of setoff.
Even if you are not filing bankruptcy, it can be a good idea to avoid keeping your checking account at an institution to which you also owe money.
Mistake 2: Keeping checking or savings accounts at banks known to freeze accounts of bankruptcy filers- WELLS FARGO
Some banks– even if you do not owe them money– will freeze your checking or savings accounts if you file bankruptcy.
Wells Fargo is the best-known example.
This practice has been a grey area in bankruptcy law for some time now, with many bankruptcy filers arguing it violates the bankruptcy automatic stay.
But, a recent Ninth Circuit case held that banks may freeze bankruptcy filer’s accounts even if the filer did not owe money to the bank when he or she filed bankruptcy. [ In re Mwangi, ___ F.3d ___, 2014 WL 4194057 (9th Cir., Aug. 26, 2014).]
In light of this case, we may soon see more banks freezing the accounts of bankruptcy filers.
If you have validly exempted your bank accounts in your bankruptcy filing, you will eventually regain use of the frozen funds. But, this process takes at least 60 days– and sometimes longer.
How are you going to pay expenses in the meantime?
Mistake 3: Choosing a bankruptcy filing date when your bank account balances are artificially high
When you file bankruptcy, you must list (on your schedule of assets) your exact bank account balances as of your bankruptcy filing date. If you want to keep the money in these accounts, you must also apply your exemptions to protect these funds.
So, you will want to choose a filing date that legitimately minimizes your bank account balances.
For example: if you are paid on the first of the month and you pay your living expenses on the fifth, you probably will not want to file bankruptcy on the 1st – 4th of the month. This is because your bank account balances will appear artificially high until you pay your living expenses.
Remember: your bankruptcy exemption amounts are limited. Use your exemptions wisely.
Mistake 4: Not exempting your anticipated income tax refund
You bankruptcy paperwork asks you to list all your assets and also asks whether any person or entity owes you money. Anticipated tax refunds are considered an asset and are also considered money that is owed to you.
So, in order to keep your tax refund, you must disclose it and exempt it– even if you haven’t received it yet.
Better yet, ask your attorney whether it makes sense to wait until you have received your tax refund and spent it on necessary living expenses or bankruptcy fees. Then you won’t need to use your exemptions to protect this asset. (Remember: your exemptions are limited. Use them wisely.)
But, keep in mind every case is different, so you should discuss this issue with your attorney. The above information might not apply to people with complex tax issues.
Mistake 5: Giving away, selling, or transferring title of assets prior to filing bankruptcy
For at least six months prior to filing bankruptcy, you should avoid giving away assets, selling them for less than fair market value, or changing title of the asset into another person’s name.
Some transactions should be avoided for a year prior to filing bankruptcy. The timelines will depend on the type of asset and the identity of the other party to the sale.
Impermissible transactions can be set aside in your bankruptcy. Worse yet, you can be charged with bankruptcy fraud if you attempted these transactions in an attempt to defraud your creditors by artificially reducing the size of your bankruptcy estate.
Mistake 6: Not disclosing assets you don’t consider to be “yours”
Maybe you don’t have any ill intent.
Maybe you just forgot that years ago a relative added your name to a bank account for convenience. Maybe a relative quitclaimed an interest in real estate to you, but you have no access to the property.
Maybe you bought a car in your name, but you have never used it because a family member is the sole driver of the car.
Even if you have never used the asset and don’t consider it “yours,” the bankruptcy court might consider the asset to be part of your bankruptcy estate. You must disclose the asset. In many cases you must also exempt it.
If you truly have no control over the asset and / or your exemptions will not stretch far enough to protect it, you will need to disclose the asset and explain the situation to the trustee.
Mistake 7: Repaying family loans just before filing bankruptcy
You must list all your debts when you file bankruptcy. This includes loans made by family members.
But, no one wants to list a family member as a creditor in their bankruptcy. Many people don’t want their family members to know about their bankruptcy.
So, many people repay family loans just before filing. Unfortunately, this causes some problems.
In bankruptcy, you must not treat family members any differently from other creditors. This means you must list them in your bankruptcy papers like any other creditor, and you must not preferentially pay them back just before filing bankruptcy.
The bankruptcy code prohibits such transfers and calls them “preferences.” A debt payment to a family member one year (or less) before filing is often considered a preference and can be reversed by the bankruptcy trustee.
If you just want to repay your family members and you aren’t worried about their knowing about your bankruptcy, keep in mind you are free to voluntarily repay your debts after your bankruptcy case is closed. The bankruptcy merely eliminates your legal responsibility for the debts.
Mistake 8: Waiting until you have judgments against you before filing bankruptcy
When considering bankruptcy, many people say “I don’t want to file, but I will file if one of my creditors sues me.”
But, debt collection lawsuits can move very quickly. If you wait until you are sued, you may not have enough time to prepare your bankruptcy filing and pay all bankruptcy fees prior to your court date. If you lose the case, you will have a judgment entered against you.
Once you have a judgment against you, it can become secured debt if you have assets to which it can attach and the creditor pursues attachment.
While a bankruptcy may be able to eliminate your personal liability for paying the judgment, the secured part of the debt (that is, the lien) might remain on the attached property even after your bankruptcy.
Sometimes judgment liens can be removed (“avoided”) in bankruptcy. But, this isn’t always possible. And, even if the lien can be avoided in your bankruptcy, this makes your bankruptcy case more complex and you will have higher court and attorney’s fees.
There might also be a public record of the judgment against you, which can cause problems for people who are required to maintain security clearances for their jobs.
The short answer is: when possible, file bankruptcy before any debt lawsuits reach a judgment stage.
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There are a lot of issues to keep your eye on when planning for and preparing your bankruptcy. Bankruptcy pre-planning can be the most complex part of filing bankruptcy.
And, as already noted, you should avoid some of the situations in the “Mistakes to Avoid” posts even if you never file bankruptcy.
But, if you keep in mind the general philosophy of bankruptcy, the issues start to make more sense.
[fancy_box title=”BOTTOM LINE” variation=”silver”]Be especially careful to disclose to your attorney any unusual aspects of your finances AND any unusual financial events that take place in the year before your bankruptcy filing.[/fancy_box]