What Should I Not Do Before Filing For Bankruptcy?

by Carmen Dellutri, Esq.

October 29, 2012

I see people make many mistakes when filing for bankruptcy.  It could be in their paperwork or it could be failing to plan appropriately.  Here are the top 5 things that people do wrong when filing for bankruptcy protection in Southwest Florida.  The list in your jurisdiction may be the same or it may be different; however, you should eliminate these problems before filing.  If you have one of these issues and you need to file anyway, it would be best to make your client aware of the problem prior to filing, look at the possibility of filing under a different chapter or seek another alternative completely.

1. Using YourIRA, 401K or other Qualified Retirment Plan.

Florida’s exemptions protect your IRA, Inherited IRA, 401K, etc. from creditor’s claims.  The Florida Legislature saw fit to protect those assets for you.  I guess they wanted people in Florida to have a secure retirement.  Why then would you use that money to pay unsecured creditors.  Yes, I’m aware that you have a contract, promised or are feeling very guilty about this obligation.  I’m here to tell you that there are alternatives to liquidating your 401K.  In a nutshell, these assets are protected from creditor’s claim either inside or outside of bankruptcy.  So, if a debt collector tells you that your 401K will be garnished, he is lying.  Also, if your kids are hitting you up for a loan, and your only source for the funds are your retirement plan, it may hurt, but you need to tell them no.

2. Protecting Your Tax Return

You do not need to wait until tax season to protect your tax return.  Guess what?  It is always tax time.  Tax time starts in January and runs all year long.  The time to think about protecting tax returns is now, not April 15, 2013.  There are many things that people can do to protect their tax refunds, but it may require some planning.  Florida’s personal property exemptions do not leave room for errors like this.  You should speak to an Attorney now if you are thinking of filing for bankruptcy and are due to receive a refund.

3. Preferential Transfers (Paying back friends or relatives before filing)

The bankruptcy code was designed to protect both debtors and creditors.  In this way, the debtor will be protected from their creditors and creditors can be assured that actions taken by the debtor will be scrutinized to prevent debtors from liquidating all their assets prior to filing.  Well, a preferential transfer to a friend or family member prior to filing for bankruptcy protection is a big no-no.  It’s not that we don’t want Mom and Dad to be repaid, it’s just that we don’t want them to get paid to the detriment of the other creditors.  Here, the bankruptcy can and will sue the friend and family member to get the money back into your bankruptcy estate.

4. Transferring Assets Prior to Filing

Similar to #3 above is when a debtor starts transferring assets prior to filing bankruptcy.  Nothing raises a red flag faster than a debtor who sells a car to a friend or family member at the very last minute.  It happens all the time, and attorneys should caution their clients about this type of behavior.  In the past, I have been part of these transactions, and they can be done properly and in a way that will protect the debtor’s interests.

5. Loading Up the Credit Cards Before Filing

I saved the best for last.  There is no reason to load up the credit cards prior to filing for bankruptcy.  I don’t care what your cousin’s sister’s brother in law told you.  If you know someone who got away with this type of behavior, I say you have a better shot in Vegas if you want to gamble.  If you go out and go on a spending rampage, it may very well come back to bite you in the end.  I would rather file bankruptcy for someone who has not had any purchases, cash advances or balance transfers for at least 6 months.  This way I know that the client has not made this mistake.

Like I said, there are many other dangers and pitfalls when considering filing for bankruptcy, but these seem to be the big 5 in our neck of the woods.  If you want to add to the list, please feel free to contact me via email.

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Carmen Dellutri is a proud member of the Florida Bar, and he is a Board Certified Consumer Bankruptcy Attorney, Certified by the American Board of Certification. He practices in the areas of Consumer Bankruptcy and Plaintiff's Personal Injury. He is the principal attorney at The Dellutri Law Group, P.A. The firm supports many charitable and civic causes by donating time and much needed capital to our community. Mr. Dellutri and the other attorneys in the firm routinely speak to students of all ages about various legal and societal issues.

Last modified: October 29, 2012