16 Feb Mistakes To Avoid Before Filing Bankruptcy.
In How Can I Avoid Bankruptcy I give you four mother load principles to keep your financial head above water. Those basic concepts deal with maximizing income and minimizing expenses. Unfortunately, circumstances may drive you deep into debt – too deep to recover. When they do, do not make these all too common mistakes before filing bankruptcy.
Don’t Cash Out The Bank. You scrimped and saved money for an IRA, 401k, 403b, pension, profit-sharing or other retirement-type account. In most states and in most cases, the money in these accounts is shielded from the reach of creditors and exempt from a bankruptcy estate. Unless this money will solve all your financial problems, leave it where it is. It could be there for you after your bankruptcy.
Don’t Cash Out The House. For the better part of the past twenty years, housing prices have increased. As the value of your house goes up, so goes the equity – the value of the house minus the loan balance. With an increase in home equity, mortgage lenders eagerly offer loans to persons in dire straits. The loan is called a home equity loan, but that name is a misnomer. The loan results in a mortgage lien against the house as a whole, not just the equity. If the loan defaults, the entire house is at stake, and foreclosure is imminent. A second important point involves the concept of secured and unsecured debt. A home equity loan is secured against the property. A credit card, a personal signature loan, a medical bill are all examples of unsecured debt that are not backed by collateral. Foreclosure is not a direct consequence of not paying unsecured debt. If you take money from a home equity loan and use it to pay unsecured debt, you are in effect, substituting secured debt for that unsecured debt. That substitution places the home at risk in the event of default. Third, the mortgage lien reduces the amount of equity you can protect through use of a homestead exemption. If you can’t pay your bills now, don’t assume you will be able to pay a home equity loan.
Don’t Cash Out The Family. People often fail to fully disclose the extent of financial problems. A family member may be willing to lend some money, but if it is not enough to settle all the debt, then, once again, you may be wasting the money and wasting your family goodwill. You still may need to go into bankruptcy to resolve the remaining debt. And your family may not be able to or want to help you in the future.
Don’t Pay Back The Favorite Creditor. Parents, friends, and relatives who you owe money are all creditors. Paying back some debt at a time you are unable to pay all your debt constitutes a preferential transfer of money. Often people attempt to pay back certain people without realizing a Bankruptcy Trustee can undo the payment and force these creditors to return the money. The last thing you want to do is expose your family or friends to a preference action, especially if those creditors have spent the money you gave them.
Don’t Pay Off The Car Loan. You are allowed to protect a certain amount of equity in one or more vehicles. This exemption varies by state. It is not unlimited. Paying off a car loan creates more equity in that vehicle. If the equity exceeds the amount of the allowed exemption, you will have to buy the non-exempt portion from the Bankruptcy Trustee, or the vehicle may be sold for the benefit of your creditors.
You really and truly know whether you can pay your bills. If you cannot, do the reality check, and speak to a bankruptcy lawyer before you make matters worse.
Andy Miofsky, Esq.
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