What Not to Do Before Bankruptcy

14 May What Not to Do Before Bankruptcy

When I read Jonathan Ginsberg’s post about a client who made a mistake that will delay filing his bankruptcy, I was reminded of a similar situation that came up with some of my clients.  Jonathan’s client made the mistake of transferring credit card balances to take advantage of lower interest rates, when the balances could have been wiped out in bankruptcy.  My clients–in a last-ditch effort to avoid bankruptcy–refinanced their home, took the equity out, and paid about $30,000 in credit card bills, and $4500 to the debtor’s father.  Unfortunately, the $30,000 was only about a quarter of the unsecured debt they owe, so they are still facing bankruptcy.  To make it worse, they chose to pay credit cards, which could be discharged in bankruptcy, but have approximately $40,000 in student loan debt which will survive bankruptcy.  And, to make it still worse, when they do file bankruptcy, the trustee is going to ask for (and get) that $4500 back from the debtor’s father.

What difference would it have made had they come to see me before they did this?  I would probably have advised them not to add to their mortgage balance at all, but if they did, to use that money to pay the student loans (or other nondischargeable debt, like taxes), not the credit cards that are wiped out in bankruptcy.  And the $4500 to Dad?  Pay that back after bankruptcy.  As things are now, their mortgage payment is higher, they still have to pay the student loans, and they are going to have to pay Dad again.
As Jonathan says, if you think there is even a 1% chance that you will have to file bankruptcy, sit down with a bankruptcy lawyer and get the facts.  Find out what your options are, and what not to do.

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