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Considering Bankruptcy? 6 Mistakes to Avoid Before Filing

Bankruptcy is a positive measure that will undoubtedly improve your life after a financial disaster. But it can be filled with financial, physical, and emotional ramifications. To help mitigate the stress of having to file for bankruptcy, be sure you avoid these six mistakes while preparing.

1. Draining Retirement Accounts

Your retirement accounts are generally exempted from bankruptcy proceedings. This means they will outlast your bankruptcy issues and continue to provide a safer future for you and your family. So don't use them up trying to stay afloat before declaring bankruptcy.

If you need to take money away from your retirement to keep up with your bills, it's time to consider resolving your issues with a more effective solution: bankruptcy. 

2. Moving Slowly or Quickly

Declaring bankruptcy is a hard decision for most people. But if you spend too long trying to find other solutions, you could end up making your situation worse.

As creditors get to the point of wage garnishment, for instance, you will lose even more money in your paycheck with which to pay bills. And taking out new loans that must be secured could result in turning debt that could be easily forgiven in bankruptcy into debt that puts your home or car at risk.

On the other hand, you don't want to move too quickly either. Wait until the financial crisis, health emergency, or other disaster is over and all the bills have come in. Remember that you will have to wait seven years or more before you can receive bankruptcy protection again. 

3. Moving Assets

It's tempting to move certain assets out of your name so you don't have to list them in your bankruptcy but doing so can make your case seem fraudulent and get dismissed.

Transfers of property can also be reversed by the trustee, causing additional delays or difficulties for the receivers. If you have legitimate reasons for transferring any asset, talk with your attorney before doing so. You will also need to list the asset as a gift or transfer on your Statement of Financial Affairs. 

4. Not Doing Your Taxes

Don't avoid the taxman if you're thinking about filing for bankruptcy. The trustee assigned to your case will check to make sure that all your taxes are completed, so do them before you start the proceedings if possible. If you cannot pay amounts due, remember that there are installment payment options. 

Taxes matter because potential tax refunds that could be used by the trustee to pay your debts. And even if you don't get a refund, there could be financial information on your returns that the trustee needs to know to make a correct case. 

5. Racking Up New Debt

Charging up new debt right before filing for protection is an abuse of the bankruptcy system and the creditors. If you give the appearance that you're taking advantage of the filing, the court could dismiss your bankruptcy petition because it appears to be fraudulent.

If you must use credit cards to survive, limit charges to those things that are necessary to get by during the month, and avoid purchases that appear luxurious. 

6. Being Selective in Debt Payment

Another way you could be seen to take advantage of the system is to pay some debtors while not paying others. Selective repayment (called preferential transfers) can cause new problems for everyone.

The trustee may request back large amounts paid to a particular creditor in order to more evenly distribute the money. This is particularly problematic if you pay back friends and relatives before creditors - something that will be obvious to the trustee. 

Are you ready to start looking into protection through filing bankruptcy? To get more answers on how it works and what to avoid while you wait, talk to the bankruptcy law professionals at C. Taylor Crockett, P.C., today.