Sunday, 9 August 2020

3 Things You Should Not Do Before Filing Bankruptcy

Filing Bankruptcy

In this article, I wanted to talk about three things you should not do if you anticipate needing to file for bankruptcy. Now, at the time that I'm writing this, we're dealing with this coronavirus, Covid-19 pandemic and there's a lot of uncertainty when it comes to jobs and income and being able to deal with debts you may have incurred in the past. Many people are considering the possibility that they may have to file bankruptcy down the road and if that's your situation, I want to give you advice on three areas of things that you should not do if you anticipate needing to file for bankruptcy. 


1. Don't Pay Family Or Friends

This is a natural thing that a lot of people have when they're getting ready to file for bankruptcy is they start to think about the debts that they owe to family or friends who've loaned them money over the years, they don't want to hurt them. Obviously, that's natural. We don't want to hurt those that we love and our friends. So what they do is they think I'm going to pay them back so that they don't get hurt by me filing for bankruptcy. This can cause huge problems and not only for you and your bankruptcy but for the person who loaned you the money. 

Here's how it works. 

If you owe money to a family member or a friend or even like a business partner or somebody who's close to you, who you have some connection to, the court calls these "insiders", and if you owe money to an insider and you repay them within the 12 months prior to the filing your bankruptcy, it's considered a preference. Meaning you're preferring that family member, you're preferring that friend over your other creditors. So what will happen is if you then file, particularly chapter 7 bankruptcy, but any of the chapters of bankruptcy, a bankruptcy trustee will go back to that family member or a friend that you've been repaying and they're going to say, give us the money back, which is going to make things scheming super awkward for years to come. So the best way to avoid this is to not pay them back at this point. If you want to voluntarily pay them back after your bankruptcy case is over, that's fine. You'll be okay there. But paying them back in the year prior to the filing of your bankruptcy can cause some significant issues. 

Now you may be saying to yourself, that's great advice, but I've been paying them back for the last year what do I do now? In those types of situations where there have been ongoing payments over the last 12 months, you have a couple options. One is to wait a year from the time the last payment was made until you file for bankruptcy. This is often difficult to do because most people are filing bankruptcy because things have reached a crisis point where there's a wage garnishment or a lawsuit and something like that. If you can wait, that's going to make it the easiest as far as not having to deal with it at all. If you can't wait to file for bankruptcy, then you need to go in knowing one of two things. One, that the person you paid the money to is going to have to pay those funds back to the bankruptcy court for the bankruptcy trustee for distribution to your creditors. 

Alternatively, here in Arizona, many of the trustees will work out some type of payment arrangement where you as the person who is going through the bankruptcy process can pay some of those funds back over time. Now, they don't give you a whole lot of time. We're talking two to maybe four or five, six months' timeframe where you could actually pay those funds back instead of the person that you paid them to. You can make some type of arrangement so that your bankruptcy case can still be processed but they don't go after the family member or the friend that you've been repaying. 


2. Don't Give Away Assets

The thing you need to avoid is just giving away assets. I've heard this one a lot. Some people I know, they need to file for bankruptcy. They have an asset that they're worried about losing during the bankruptcy process. Let's say that they had a boat and that the boat was paid for and they think I have an idea, I'm going to transfer the title to this boat to my brother. My brother can hold the boat while I go through bankruptcy and then when I get done my brother can transfer it back to me. The problem with that whole idea is it's a crime, a legitimate crime, it's a felony, it's a federal offense. You can't intentionally transfer assets out of your name in an effort to hide them from the bankruptcy court. Not only that, but they're also going to find out, you've got to realize that there are millions of people that have filed for bankruptcy in the United States and they know all the tricks. They know this transferring of assets can cause issues. A lot of times though, it's not done with an intent to do fraud, but there may be a situation where, the one that I see quite often is where a family has teenage children, the teenage son or daughter has a vehicle that they purchased but it was purchased in mom and dad's name, whether it be for insurance reasons or whatever and so they transfer the title to the son or daughter prior to going into bankruptcy. That can still cause problems. 

The bankruptcy trustee can go and reverse that transaction if you sold or transferred something in the two years prior to filing for bankruptcy for less than what it was actually worth. That last part is super important. If you sold a car to somebody and you sold it for approximately what it's worth, that's fine. As long as it was an actual transaction and money actually changed hands. It's totally different if you just transferred an asset out of your name and you didn't receive anything in exchange for it. So those are the types of issues that you're going to have to deal with when it comes to transferring assets. You've got to be very careful if there have been any transfers of property out of your name in the last two years prior to filing bankruptcy where you didn't receive the value of that asset back to you. 


3. Don't Use Credit Cards Before Filing Bankruptcy

The third thing you got to be careful of is credit card use or cash advances within a 70 to 90-day window prior to filing bankruptcy. The first thing we'll talk about is the credit card used within the 90 days prior to filing for bankruptcy. If you charge something that the court considers to be a luxury item and the bankruptcy code doesn't define what a luxury item is, there are some court decisions that have given their input on it. Generally, things, if you're buying diapers or groceries on credit cards, those are not considered luxury items. However, if you're buying vacations or jewelry or they're really big dollar items, those could be considered luxury items. If you purchase luxury items within the 90 days prior to the filing of your bankruptcy on a credit card and the total of the transaction is more than $725, you could run into an issue where the creditor could come in and object to those specific charges from being discharged in your bankruptcy. It's important to know the creditor actually has to come in and raise this objection. It's not something that the court raises.

 I can tell you in general in practice,  I haven't seen that happen that often, but the safest way to go is to not use your credit cards once you make that decision that you're going to file for bankruptcy. This also applies to cash advances. $1000 is the limit that they look at within the 70 days prior to filing bankruptcy. You can't go and take a bunch of cash advances on your credit card and then look to file for bankruptcy. The creditor could come in and object to those specific charges from going away. 







Conclusion

Bankruptcy's a powerful tool. It's absolutely necessary sometimes particularly in tough times like this, it'll help you to get rid of most debts, most credit cards, medical bills, all those types of things can go away. But you got to be careful as far as transactions that happen in the time period prior to filing or that could cause you some big issues. I

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