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.
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. And worse, such transfers could lead a bankruptcy court to find that you have committed 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:
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 for bankruptcy.
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 wherein the bankruptcy court trustee responsible for administering the case sues the entity or person to get the money back. Learn more about bankruptcy clawbacks of preferential and fraudulent transfers.
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. You can continue to use debit cards. Find out when to stop paying your credit cards.
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 company using personal accounts. Learn more about bank accounts in bankruptcy.
Any legal claim that 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. In fact, even claims that you have against others that 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.
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 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 you'll receive 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.
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. The bankruptcy court will examine certain types of transactions within a specified period before you file. By delaying the filing of your bankruptcy until these periods have expired, you may be able to avoid problems.
Here are more mistakes made during the bankruptcy filing process that can complicate your bankruptcy case. Pro se (self-represented) debtors tend to make these mistakes more often than people represented by a bankruptcy lawyer.
Most individual debtors file for either Chapter 7 or Chapter 13 bankruptcy. But each type of bankruptcy has benefits and drawbacks, and 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.
If you want to file for bankruptcy and receive a discharge, you must complete certain 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 course in personal financial management (called a debtor education course). If you don't complete the debtor education requirement, the court will not issue a discharge in your bankruptcy.
Learn more about credit counseling and debtor education.
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.
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 dismissal of your case. 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.
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:
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.
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 your 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.
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 an attorney before filing your case.