Common Mistakes to Avoid Before Filing Bankruptcy, and Longer-Term Bankruptcy Planning

Common mistakes to avoid before filing bankruptcy:

Do not sell, give away, or transfer property for less than fair-market value.  Some people make the mistake of giving away their property to family members or friends, or they “sell” the property for extremely low values.  These types of transfers are considered fraudulent or voluntary conveyances that can be undone and may also result in a denial of discharge in bankruptcy.

Do not prefer or pay back certain creditors before others, unless and until you have consulted with a bankruptcy lawyer.  Some people make the mistake of paying back relatives before general unsecured creditors.  These transfers may be considered preferences, which can be recovered in bankruptcy in order to spread the money out among all similarly situated creditors.

Do not borrow money from your family members or friends, unless your overall financial situation is improving.

Do not buy luxury goods or services on credit before filing bankruptcy.  The period before filing bankruptcy is not the time to take a cruise or buy a mink coat on credit.  These types of purchases may be deemed to be fraudulent and result in a denial of a discharge for that particular debt.

Do not destroy or falsify financial records.  The failure to produce records or to satisfactory explain financial transactions can result in a denial of discharge.

Do not draw on or deplete your retirement accounts.  Retirement accounts are usually exempt from creditor process, so you can keep them during bankruptcy.

Longer Term Bankruptcy Planning:

Married couples should keep separate accounts and separate debts.  Equity in the marital residence is usually protected in Virginia by a tenancy by the entireties, and is only subject to joint debts, except for a debt to the IRS.

Be careful about using credit unions.  Although credit unions offer more favorable terms, they do have some greater creditor rights than ordinary banks, including cross-collateralization rights and rights to reaffirmation of debts without a court hearing in bankruptcy.

Contribute to your retirement accounts.  Retirement accounts are generally exempt from creditor process and can be kept in bankruptcy.

Pay your support obligations and taxes.  Support obligations and taxes are priority debts, and generally nondischargeable in bankruptcy.  A debtor must pay these debts in almost any event, so those are the last debts to stop paying, and only if impossible to do so.

Consult with a bankruptcy lawyer sooner rather than later.  If you are contemplating bankruptcy, you should consult with a bankruptcy lawyer.  Many bankruptcy lawyers offer free initial consultations.  Bankruptcy is more technical and complicated than it appears.  The money spent on legal fees is usually well worth the return.

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