If you are considering filing for bankruptcy, there are certain actions that you should avoid in the months and years leading up to your filing. It is also recommended that you meet with an attorney if you are considering bankruptcy, as legal representation can help you to avoid potential problems.
If you owe friends and family money, don’t repay them before filing for bankruptcy. There is a rule in the Bankruptcy Code that will allow the trustee to treat such payments as "preferential," meaning they are prejudicial to other creditors. These payments to friends and family can be set aside by the trustee, meaning the trustee can sue the individual to recover that payment and bring the funds back into your estate so that it can be redistributed among the other creditors that you owe.
If you accumulate new debt in the 70-90 days prior to your bankruptcy filing, then that creditor could attempt to object to the discharge of that debt. The creditor could argue that you took the loan out without any intention to repay it and that you shouldn’t be able to discharge the debt during bankruptcy. As a rule, cash advances of $750 or or more within 70 days before filing will result in the denial of a discharge. Likewise, using a credit card for the purchase of a luxury item 90 days prior to filing will generally result in a similar denial of debt discharge.
Don’t cash out or take money from your 401(k) or IRA retirement accounts to pay off debts. This is especially true of credit card debts or even a mortgage if there is a strong likelihood that you will ultimately lose your home. In a Chapter 7 bankruptcy, your 401(k) savings will be untouchable by the bankruptcy trustee and creditors, as these savings are protected by the spend thrift clause found in federal legislation. As a Chapter 7 debtor, you could have unlimited funds in this account without worrying about it being taken away with a bankruptcy filing. IRA savings accounts have a similar exemption.
When filing for bankruptcy, you will be required to disclose all of the assets that you have given away or sold within four years of your filing date. This will include vehicles, cash, investments, real estate, and other valuables. If you sold property for a fair price, there won’t be a problem. However, if you have transferred your assets for less than a fair market value, the trustee could suspect that you are hiding the items to avoid having them accessed by the court in order to repay your creditors.
Once you’ve decided to file for bankruptcy, you shouldn’t make payments toward your debts without first consulting with an attorney. Continuing to pay on your debts once you have decided to file for bankruptcy won’t help your case or allow you to retain that line of credit once the bankruptcy has been discharged. In most situations, creditors will close out your accounts once you have filed for bankruptcy, regardless of whether or not you have continued to make payments.