People have a lot of misconceptions about bankruptcy, and these wrong ideas cause them to make a lot of poor choices in the months leading up to filing. The easiest way to avoid errors—and to discharge as many of your debts as possible—is to learn as much about the process as you can before you file.
6 Mistakes to Avoid When Filing for Bankruptcy
The first thing people need to know before declaring bankruptcy is to make sure that they file for the right type of bankruptcy. Most consumer bankruptcies are either Chapter 7 or Chapter 13, but there are significant differences between the two. You should choose between Chapter 7 and Chapter 13 bankruptcies carefully, as the wrong form of bankruptcy can force you to sell off your property and assets in order to pay off debts.
That said, the most common mistakes people make before filing for either type of bankruptcy include:
- Running up credit card debt. Since bankruptcy usually forgives credit card debt, many people use their cards as much as possible before declaring bankruptcy. What they don’t realize is that they can be forced to pay any charges that are made 90 days before filing, as well as any cash advances that are taken out 70 days before filing.
- Repaying debts to family members. If you owe a friend or family member more than $1,000 in personal debts, it is best not to pay them before filing for bankruptcy. Any money paid to friends and family during the year before you file can be recovered during your bankruptcy to be applied toward other debts you owe.
- Transferring property to someone else’s name. If you attempt to save your home or defraud your creditors by transferring real estate or property to someone else, the court may reverse the transfer if it occurred within four years of the day you file bankruptcy.
- Withdrawing funds from a retirement account. Retirement accounts are usually exempted from bankruptcy proceedings. However, once a person withdraws money from a retirement account, it is considered income and is no longer protected.
- Mortgaging their homes. Some people will attempt to avoid bankruptcy by mortgaging their homes. This is often ineffective, but more importantly, a family home is usually protected from foreclosure in bankruptcy.
- Hiding assets. Bankruptcy can give you a fresh start, but only if you are open and honest during the proceedings. Attempting to hide assets from the court or your attorney can result in the loss of your assets, bankruptcy denial, or even jail time.