While considering what to write about next on the subject of personal bankruptcy, I started thinking about a number of conversations I have had with many clients or prospective clients. Each client’s situation is unique but it seems that many common problems keep arising. Below are common bankruptcy mistakes:
1. The credit card run-up sin:
When Congress was considering what debts should not be permitted to be discharged, they put this issue right at the front of the line (actually it was second in line to certain type of taxes)! Consumer debts that are incurred for luxury goods or services in excess of $550.00 within 90 days prior to filing a bankruptcy petition are presumed to be nondischargeable. In addition if you obtain cash advances in an amount more than $825.00 within 70 days prior to filing bankruptcy the debt incurred will be presumed to be nondischargeable.
There was a good reason Congress made the law what it is today. Think about the word fairness. Would you think it is fair for someone to come to you to borrow money when they had no intention of ever paying you back? That is exactly what would happen if Congress allowed people to discharge debt that they incurred on the eve of filing bankruptcy. I don’t personally have any sympathy for the credit card companies but at the same time I am a proponent of laws being passed to prevent people from outright theft. Any good bankruptcy attorney would recommend that you stop using your credit cards even if you are thinking about filing bankruptcy. Odds are if you are reading this article you should probably stop using your credit cards. There are ways to fix this problem if it has already occurred.
2. The repay a family member sin:
Here is the bottom line – when it comes to repaying debts, you cannot treat a family member any better than you would any other creditor. An important point to know about this sin is that the bankruptcy trustee can go to the family member and make the family member turn over to the trustee any amount you repaid the family member within one year of filing bankruptcy.
3. The transfer property out of your name sin:
After a client figures out that they can exempt only one car, the client has an epiphany and decides to transfer all but one car out of their name. Usually they get a friend or a family member to take title to the vehicles. Most of the time they don’t receive any money for the vehicle and intend to transfer it back into their name after the filing of the bankruptcy. I really should charge some sort of additional fee to clients that decide to make this mistake because it is such a kick in the gut when I have to stop everything in the case to help them undo what they have done. One consequence involves the bankruptcy trustee undoing the transfer of the property, taking the property, liquidating the property, and using the money to pay creditors. The harsher consequence involves the United States Trustee filing a complaint to revoke the persons discharge. It is never good when a division of the United States Department of Justice files a federal lawsuit against someone. The rule to remember with this sin is that it is illegal to transfer property with the intent to hinder, delay, or defraud a creditor. By the way, don’t think for a moment that every scheme imaginable hasn’t been tried. There are a number of easy and legal ways to deal with bankruptcy estate planning. Talk to a qualified bankruptcy attorney before doing something you may regret.
4. The liquidate / borrow against your retirement account sin:
This sin doesn’t get you thrown in jail but is still a definite kick in the gut. Under just about every situation, your retirement accounts are generally protected and cannot be taken from you in bankruptcy. Before cashing an account that you have worked so hard for and that you have planned on using for retirement, consider filing for bankruptcy. It honestly tears at my soul to see people who have literally nothing left after years of cashing/borrowing from retirement plans. Seek help before stealing from yourself.
5. The line of credit/second mortgage to pay off debt sin:
This sin is similar to the sin above. Typically, your homestead is protected and cannot be taken from you in bankruptcy. Don’t borrow against your home in an attempt to pay credit cards. All this will do is increase your monthly payment and reduce your equity. Your home is an investment that you should look at as long term. Don’t blow it on a short term fix that may not resolve the underlying problem. In addition it can potentially put your home at risk in the future. Once again, you can often file bankruptcy and not lose this valuable asset.
6. The failure to appear at court proceedings sin:
Many of my clients found themselves being sued before they filed for bankruptcy. Sometimes a person does the ostrich trick and sticks their head in the sand. Not confronting a lawsuit can actually cause more problems than just dealing with it. Problems can include garnishment of wages which can be financially difficult and embarrassing. Further problems can include finding that all the money in your bank account has been levied or “frozen.” This can cause payments to the creditors you want to pay such as your rent, mortgage, and electric to bounce and cause you substantial overdraft issues.
The biggest issue surrounding lawsuits may involve what the judgment itself means to your home. In basic terms, judgments become liens on real estate. This means that if you own your home and have a judgment against you, your house has a lien on it for the amount of the judgment. This lien can be stripped or avoided but it is an additional step that takes time and can be a significant problem when you go to sell your home. If you are uncomfortable dealing directly with the creditor or their attorney, have a bankruptcy lawyer do it for you.
Another point to make is that even if you decide you will be filing bankruptcy, you are not fully protected until the case is actually filed and collection activity can continue. Until your bankruptcy case is actually filed, a collection case can continue.
7. The failure to tell your attorney the truth, the whole truth, and nothing but the truth sin:
Bankruptcy attorneys don’t have crystal balls and are thus unable to see into the souls of mankind. In any area of the law, your attorney can only provide legal advice that is based upon information provided by you. Failure to disclose assets, debts, transfers, income, or anything else relevant to your case can lead to a loss of assets or denial of your bankruptcy case. We do our best to get to the bottom of the issues when we meet with our clients and normally my clients don’t lie. When it does happen, though, the consequences can be severe. Intentionally lying can result in not only the loss of assets but can also lead to a denial of your bankruptcy case, fines, imprisonment, or all of the above.
The best course of action to avoid the seven deadly sins of bankruptcy is to seek legal advice regarding your debt and your rights before doing anything. Even if you have taken certain actions that you feel may cause problems as stated above you should consult with an attorney to determine the best course of action.
Sam graduated from Drake Law School after completing undergraduate work at the University of Iowa. After passing the bar, he developed a general law practice that included work in criminal, family and juvenile law. As time passed, he began focusing specifically in the areas of bankruptcy and consumer protection. Sam is frequently asked to provide lectures to attorneys, business professionals and the public on the topics of consumer protection and how these issues affect other aspects of the law. He enjoys these presentations and the opportunity they provide to discuss current events the legal system. Sam has received a number of awards and is proud to be a member of the National Association of Consumer Bankruptcy Attorneys and the National Association of Consumer Advocates. He’s involved with those organizations because they’ve provided resources he’s been able to use to help his clients–not because touting membership is a good marketing strategy or because it might impress someone.