Common Mistakes Before Filing for Bankruptcy

Generally, people do not prepare to go bankrupt. In fact, the average person resorts to various extreme measures in order to prevent a bankruptcy and only after everything else fails, do they resign themselves to the thought of going bankrupt. Unfortunately, it is only after a person has exhausted all means of acquiring additional monies that severe damage has been done to themselves financially and to their bankruptcy case overall. Common sense dictates that in order to catch up on our bills, we need to find ways of quickly earning additional monies.

In order to do this, most persons will start by working all overtime available or obtaining a second job to earn extra income. Some people will try selling assets, borrowing against their retirement plans, adjusting their W-4 exemptions to far exceed their allowed exemptions or borrowing money from relatives and friends. More often than not, these attempts ultimately prove futile, never providing enough monies to really catch up and/or pay off certain debts. Unfortunately, it is the very act of trying to earn additional monies that actually places a person in a worse position upon filing for bankruptcy.

Essentially, you should include bankruptcy in your list of options when you first realize that your expenses are outpacing your income. Sometimes this realization is very sudden, such as a spouse becoming ill or you have suffered a lay off from your employment. Other times, the effect is more gradual, like quicksand; interest rates on credit cards have went up substantially, your home is secured by an Adjustable Rate Mortgage, causing your house payment to increase. More often than not, it is a combination of events that cause even the most frugal person to stumble.

Imagine, for a moment, you have found yourself in a position where your monthly expenses are outpacing your ability to earn monies. Then imagine debt collectors calling you, pressuring you, harassing you and perhaps even threatening you. It is easy to understand why people do desperate things. If you are seriously thinking about doing something drastic to earn/make additional monies to pay bills, you should schedule a case evaluation with one of our Fresno bankruptcy attorneys at the Arnold Law Group, APC.

#1: Increasing Your Pay By Working Overtime or Working a Second Job

This seems very logical to most of us. Common sense tells us that if we earn additional monies, we can in fact pay our bills and therefore, not have to worry about bankruptcy. Although this seems like a very logical plan, you must keep in mind that overtime may not always be available and second jobs, oftentimes may not be long lasting for various reasons. Unfortunately, the extra income you earn may only pay a fraction of your bills and only serve to raise your average income.

Remember your income is averaged through a means test, over the past six months. If you earn over your state’s median income, you may have to file a Chapter 13 as opposed to a Chapter 7. In fact, even if your income is such that you would have to file a Chapter 13, you are facing a position where your average monthly income is higher, thus your monthly payments to the Trustee could very well be higher.

#2: Adjusting Your Exemptions, Allowing You to Earn a Higher Net Income

This is one of the worst things you can do. In the short term, you realize higher net earnings, meaning you see more of your hard earned monies after tax deductions, due to the fact that you are paying much less in taxes. Unfortunately, as you have only had minimum taxes held out of your paycheck or perhaps no taxes withheld, you are likely to still suffer the bankruptcy as such additional funds are generally insufficient to pay off debt. Further, you have a new problem. You get a big fat IRS tax bill. Unfortunately, you cannot go bankrupt on this new tax bill and ultimately, you succeeded in creating more financial problems for yourself.

#3: Selling Your Assets

Once again, this seems like common sense, however, a transfer of such assets may only serve to allow the Trustee to take back the asset from the person you sold it to and/or if you used these newly acquired monies to pay a specific creditor, they may in fact require the creditor to return these funds, whereupon the trustee will divide this money and give it to your to unsecured creditors. To rub salt in the wound, you may have been able to exempt the asset, which would have allowed you to keep the asset even after the bankruptcy discharge, protecting it from your creditors.

#4: Taking a Loan Against Your 401(k), 403(b) or Pension Plan

This is another move that is ultimately ill advised. As your Retirement/Pension plan is almost always exempt in a bankruptcy and your loan is secured against this exempted item, you will not be allowed to discharge this loan. The result will be that you will be paying back the loan, generally, directly from your paycheck, and still have to file bankruptcy. Once again, to make things worse, your pension and/or retirement plans are generally exempt assets, which means that these plans cannot be taken from you by the Trustee’s office.

#5: Borrowing Money From Relatives or Friends

William Shakespeare once said: “Neither a Borrower or Lender be.” Although this line was written some 400 + years ago, these are still wise words. Generally, the amount of monies you are able to borrow are limited and will be insufficient to pay off balances owed to your creditors. Essentially, borrowing monies from relatives often results in placing a Band-Aid over an opened wound.

Ultimately, when bankruptcy becomes a reality, you are now placed in a position where you have to count these friends and relatives amongst your creditors. Worse yet, if you paid them off prior to going bankrupt, the Trustee could force them to return the monies for redistribution to other creditors. This whole affair can only lead to an ugly situation.

#6: Borrowing Money Against Your House, Car or Other Asset

Similar to the loan taken against your retirement plan(s), unless the terms of this loan are sufficient to cover your debts and allow you to comfortably pay back the loan, you would be ill advised to obtain yet another loan. Once again, should you come to the realization that you are having to go bankrupt, you may have to decide to keep the asset thus having to pay the loan back as agreed, or surrender the asset. Neither proposition is appealing.

#7: Failing to Use an Attorney to File Your Bankruptcy Case

A good attorney who works daily with bankruptcy cases can help you prepare for filing bankruptcy, properly prepare your petition and save you from making the above mistakes. Of course, this is providing you consult with a reputable attorney prior to making any rash decisions. Additionally, the importance of properly preparing your petition cannot be overstated. A legal document preparer is certainly cheaper; however, the old adage “you get what you pay for,” could not be more relevant. The unfortunate reality is that people who try to file bankruptcy on their own often end up in a worse situation then if they would have sought good legal help.

Also keep in mind that Trustee will generally ask what seem like benign questions at your Creditor’s Meeting, such as: “Did you review your Petition and understand the Schedules?” and, “Did you sign your Petition and Review the Notice to Consumer Debtors under § 342(b) of the Bankruptcy Code?” In fact, these questions are seemingly designed to hold the party bound to the information supplied. A clerical mistake is one thing, failing to properly exempt an asset or not being truthful on your petition, is another.

#8: Waiting Until the Last Possible Moment to File

Essentially, when it comes to money problems our emotions take over. We are embarrassed, ashamed and somewhat feel diminished. Further, as debt collectors exert constant and unrelenting pressure, lawsuits are filed, wage garnishments are affixed and assets are repossessed or foreclosed upon, only then do we seek professional help.

Schedule a case evaluation today with the team at Arnold Law Group, APC and speak to one of our Fresno bankruptcy lawyers.