Chapter 7 Bankruptcy: What to Avoid Before Filing

For a trouble-free Chapter 7 bankruptcy, avoid these transactions before filing.

If you’re considering bankruptcy, there are many things that you may innocently or accidentally do with your finances, which could hurt your bankruptcy case, even if you don’t plan to file for many months. It's usually best to talk to a lawyer when planning for bankruptcy, but even before you do so, take care to avoid the below financial transactions. This will ensure that your bankruptcy filing goes smoothly and will help to avoid challenges by creditors or the trustee.

Don't Transfer Money or Property

Many consumers think that transferring their assets to their mothers' bank accounts, or putting them in their wive’s names, will protect them. But transferring assets out of your name won't protect them from the reach of the bankruptcy court. And worse, such transfers could lead a bankruptcy court to find that you have committed fraud. This is true even if you transferred the property innocently, without any intention to conceal assets.

A few examples of transfers that might get you in trouble include:

  • changing title to a child’s or spouse’s car which is in your name, into the name of your child or spouse
  • changing the name on bank accounts, or eliminating your name from accounts which are held jointly with others
  • eliminating your name as an owner on business ventures
  • depositing funds or moving funds into bank accounts belonging to others, and
  • deeding real property in your name to another person, even if it’s a legitimate transaction where real value is paid.

Many consumers move property or funds out of their name, for fear of losing them in bankruptcy. However, having assets does not mean that you cannot file a bankruptcy nor that you will necessarily lose them. An attorney will be able to tell you the best way to deal with assets that you fear may be exposed when you file a bankruptcy.

Don't Pay Creditors

Many consumers want to “do the right thing,” and pay certain creditors in full before filing for bankruptcy. For example, they may want to make sure mom’s loan gets paid, or that the people at Discover who have been very nice to them get paid in full. These transactions are prohibited.

You certainly can pay your bills as you would in the normal course of business. If you incur $100 on American Express this month, you can pay it off next month, as you ordinarily would. However, you cannot make a payment out of the ordinary, to satisfy a creditor in full. These payments are called preferential transfers. They may even lead to “claw back” lawsuits, where the bankruptcy court representative (called the bankruptcy trustee) sues the entity or person that you paid, to get the money back. (For more on how this works, see Bankruptcy Clawbacks of Preferential and Fraudulent Transfers.)

Don't Use Credit Cards

Unless you absolutely need to incur extra credit card debt for the necessities of life, such as gas, housing, or food, you should stop using your credit cards completely. You can continue to use debit cards which withdraw directly from your bank account.

Don't Make Unusual Deposits Into Your Bank Account

Do not deposit any money which is not considered salary or payment to you, into your bank account. Examples would be depositing money in your account as a favor to others, or which is not your money. Consumers with small businesses also should refrain from conducting transactions for the business through their personal accounts.

Don't Sue Anybody

Any legal claim that you have is an asset that can be taken by the bankruptcy court, even if the case is unresolved, or if the amount you may be entitled to is undetermined. In fact, even claims that you may have against others that have not been filed in court, is property of the bankruptcy estate. If you have a pending legal claim (whether it's a lawsuit or not), talk to a lawyer before filing for bankruptcy.

Think Carefully Before Taking Actions That Would Result in Future Payments

Funds that are not actually in your possession, but which you expect to be get in the future, are part of your bankruptcy estate. If you are filing for Chapter 7 bankruptcy, the bankruptcy trustee can take this money and use it to repay your unsecured creditors. Examples include agreeing to accept a future bonus at work, accepting an inheritance which will be paid in the future, or filing tax returns that entitle you to a refund. If you are expecting to receive any payments or money in the future, talk to a bankruptcy attorney.

Waiting to File

Most of the above mistakes can be cured simply by waiting to file. There are “look back” periods for many types of transfers or actions -- which means the bankruptcy court will examine certain types of transactions only within a certain period of time before you file. By delaying the filing of your bankruptcy until these periods have expired, you may be able to avoid problems.

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