What Not to Do Before Filing Bankruptcy

29 Apr What Not to Do Before Filing Bankruptcy

Every once in a while, a prospective client comes to see me and confesses to doing a little pre-bankruptcy planning of his own, without benefit of counsel. In many cases, such actions make a bankruptcy filing more difficult, more costly, or inadvisable at all. Even worse, many times the same or a better result could have been achieved through the bankruptcy filing itself, or through proper planning. The lesson: talk to experienced bankruptcy counsel first. Until then, consider these general guidelines:

  • Don’t use your resources to pay debts owed to family members before bankruptcy. The bankruptcy laws make it fairly easy for a trustee to recover those payments from those family members. It is especially important that you not use your exempt assets (like retirement funds) to make such payments. That’s like taking assets a trustee couldn’t reach, and giving them to him. If it is important to you to repay your family members, it is fine for you to do that–after bankruptcy. Doing it before bankruptcy may just buy them a lawsuit (from the trustee). Just imagine how popular you’re going to be at Thanksgiving dinner if that happens.
  • Don’t transfer anything just to get it out of your name. If the property you transfer has any value, the trustee can unwind the transfer and recover that property. If it’s not worth anything, why worry about it.
  • Don’t pay off liens on vehicles or other collateral before consulting with an attorney. Once again, you may be freeing up equity that a trustee could not reach otherwise. Again, it is especially important not to use retirement funds or the like for this purpose.
  • Don’t ignore correspondence or other papers sent to you by creditors, especially anything sent by certified mail. You may prefer to live in blissful ignorance of the steps your creditors are taking, but your attorney needs that information in order to protect your interests, and get you the most complete relief possible. It may also prevent you from going on a scavenger hunt for that information (or paying someone else to do so), in order to properly complete the documents necessary to file bankruptcy.
  • Do file your tax returns, even if you can’t pay the taxes. You won’t get far in bankruptcy without current returns, and your attorney needs to know how much your tax liability is, and when it was assessed.

No matter how much information you have obtained, or even what you’ve read on this weblog or any others, there is no substitute for competent legal advice on your particular situation. And, sooner is better. It won’t hurt to ask those questions as soon as you know you might be in trouble. Trust me–a bankruptcy lawyer will be glad to help you plan for bankruptcy, and would much rather help you avoid trouble, than try and get you out of it.

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