Chapter 7 Bankruptcy: What to Avoid Before and After Filing

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

If you're considering filing for bankruptcy, you won't want to make innocent or accidental errors that could hurt your bankruptcy case. Avoiding these common mistakes can preempt creditor and trustee challenges and help ensure that your bankruptcy case moves through the process smoothly:

  • transferring money or property
  • paying favorite creditors and not others
  • buying unnecessary items on credit
  • making unusual bank deposits, and
  • initiating unnecessary lawsuits.

Because you’ll want to avoid mistakes after filing your Chapter 7 case too, you’ll also find tips for successfully navigating the bankruptcy process.

Mistakes to Avoid Before a Chapter 7 Bankruptcy Filing

The bankruptcy court will examine past transactions made within a specified period before you file. The “look back” period is usually one to two years but can be up to ten years. Many mistakes can be avoided simply by delaying the filing of your bankruptcy until these periods have expired. But that’s not always the case, so it’s important to talk with a bankruptcy lawyer to avoid potential allegations of bankruptcy fraud.

Avoid Transferring Assets Before Filing for Chapter 7 Bankruptcy

Many consumers think that transferring their assets to their mothers' bank accounts, or putting them in their wive's names, will protect them. But moving assets out of your name won't protect them from the reach of the bankruptcy court. Worse, such transfers could lead a bankruptcy court to find that you have committed bankruptcy fraud—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
  • taking your name off of a business venture
  • 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 in which you paid the fair market value.

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 or 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 for bankruptcy, including how to protect property using bankruptcy exemptions.

Avoid Favoring Creditors Before a Bankruptcy Filing

Many consumers want to "do the right thing" and pay certain creditors in full before filing for bankruptcy. For example, they might want to make sure mom's loan gets paid or that the friendly people at Discover get paid in full. These transactions are prohibited.

You certainly can pay your bills as you would in the ordinary course. If you incur $100 on American Express this month, you can pay it off next month. However, you cannot make an out of the ordinary payment to your favorite creditor while not paying others. These payments are called preferential transfers and may trigger a "clawback" lawsuit. The bankruptcy court trustee responsible for administering the case sues the entity or person to get the money back in bankruptcy clawbacks of preferential and fraudulent transfers.

Avoid Making Credit Card Purchases Before a Chapter 7 Filing

Unless you 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 altogether. If you buy luxury purchases on credit shortly before bankruptcy, you risk a creditor objection to the debt’s discharge. You can continue to use debit cards. Find out when to stop paying your credit cards.

Avoid Depositing Unusual Amounts Before Filing Bankruptcy

You won’t want to 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 should refrain from conducting transactions for the company using personal accounts. You’ll likely have a difficult time proving that the funds weren’t yours, and it might cause a problem with your ability to pass the means test and qualify for Chapter 7 bankruptcy. Learn more about bank accounts in bankruptcy.

Be Wary of Suing People Before Filing Chapter 7

Any legal claim you have is an asset in your bankruptcy case, even if the matter is unresolved or if the amount you're entitled to hasn't yet been determined. Even claims that you have against others you haven't acted on are 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.

Avoid Filing Bankruptcy If You’ll Receive Future Payments

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

What to Avoid After Filing for Chapter 7 Bankruptcy

Making mistakes during the bankruptcy filing process can complicate your bankruptcy case, especially if you’re a self-represented debtor.

Avoid Filing Under the Wrong Bankruptcy Chapter

Most individual debtors file for either Chapter 7 or Chapter 13 bankruptcy. But each type of bankruptcy has benefits and drawbacks. The type you file will depend on your financial circumstances. Learn whether you should file for Chapter 7 or Chapter 13 bankruptcy before filing your case.

Avoid Failing to Complete Bankruptcy Education Requirements

If you want to file for bankruptcy and receive a discharge, you must complete credit counseling and debtor education requirements.

  • Credit counseling. Before you can file for bankruptcy, you are required to receive credit counseling from an approved agency. When you file your case, you will need to submit your certificate of completion to the court. If you don't obtain credit counseling before filing your bankruptcy, the court will typically dismiss your case.
  • Debtor education. After you file your case, you must also complete a personal financial management course (also called a debtor education course). If you don't satisfy the debtor education requirement, the court will not issue a discharge in your bankruptcy.

Learn more about credit counseling and debtor education.

Avoid Filing the Wrong Bankruptcy Forms

When you file for bankruptcy, you must complete a packet of forms that includes your petition, schedules, statement of financial affairs, and other required documents. If you don't have an attorney, it's your responsibility to know which forms to file and how to complete them.

You can obtain the official bankruptcy forms from the bankruptcy form page of the United States Courts website. Your bankruptcy court may also require you to fill out additional local forms. Find an overview of the bankruptcy forms with links to downloadable versions.

Avoid Failing to Follow Bankruptcy Rules and Procedures

Each bankruptcy court has its own set of local bankruptcy rules and procedures each debtor must follow. Also, after you file your case, you must provide your bankruptcy trustee with certain supporting documents (such as pay stubs and tax returns). Your bankruptcy trustee might also have additional requirements or guidelines to satisfy.

If you don't follow all of the local rules in your area, it can cause delays or even lead to your case's dismissal. In most cases, you can find your bankruptcy court's local rules by going to its website. To find your local court, go to the Federal Court Finder.

Avoid Using the Wrong Bankruptcy Exemptions

Bankruptcy exemptions allow you to keep a certain amount of property in Chapter 7 bankruptcy and reduce the amount you pay to unsecured creditors in Chapter 13. But you must conduct a fair amount of research to learn about:

  • which exemption system you can use, and
  • the type of property you can exempt.

Exemptions are significant because they can make the difference between keeping or losing an asset in bankruptcy. For this reason, make sure to research your state's exemption laws carefully before filing your case.

Avoid Failing to Attend the Meeting of Creditors

Typically 20 to 40 days after you submit your bankruptcy case, you must attend a required hearing called the 341 meeting of creditors. At the 341 hearing, the bankruptcy trustee (and any creditors who choose to participate) can ask you questions under oath about your bankruptcy and financial affairs. The court will mail you a notice containing the date, time, and location of your meeting of creditors. If you don't go, the court will usually dismiss your bankruptcy.

Talk to a Bankruptcy Attorney

Even if you want to file on your own, talking to a bankruptcy attorney before filing your case can help you discover hidden dangers and avoid mistakes. Many bankruptcy attorneys offer free consultations and can provide you with valuable information about the bankruptcy process. For this reason, it's generally a good idea to consult a bankruptcy attorney before filing your case.

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