Bankruptcy Do’s & Don’ts
PRE-BANKRUPTCY FILING DOS AND DON’TS
If your creditors are harassing and threatening you with imminent legal action, but you are uncertain as to whether or not you will be filing a bankruptcy in the near future please pay attention to the following pre-bankruptcy considerations which may protect some of your property if you do eventually have to file.
DO continue to make payments on vehicles that you intent to keep.
Your car finance company is allowed, pursuant to your contract, to repossess their collateral (your car or truck) without providing notice to you at anytime you are in default in your payments (usually three or more months behind). It is difficult enough to make a car payment when you have the car yet alone having to make arrangements to pay the deficiency balance to the finance company after the car has been repossessed. If creditors are calling demanding a repayment plan, be sure to make your vehicle payments first, ahead of the general unsecured creditors like a credit card company or medical bill.
Note: If your vehicle has already been repossessed but has not yet been sold at auction, my office may be able to stop the auction and have the bankruptcy judge force your creditor to give you the car back. In most cases, a bankruptcy case must be filed within ten days of the repossession as this is the typical waiting period before the vehicle can be sold.
DON’T borrow from, cash out or withdraw from a 401k, IRA, or other ERISA qualified savings and retirement plans to pay bills.
Any early withdrawal from these types of retirement accounts will usually make you liable for penalties and income taxes which will likely not be discharged in bankruptcy. ERISA retirement accounts and your 401K plan are exempt from liquidation by the trustee and therefore your creditors in bankruptcy. IRA funds in Michigan are also exempt from your creditors (except deposits made within 6 months before filing). Cashing out or withdrawing money from these accounts causes the funds to lose their protection because you are changing the classification from an exempt asset to potentially non-exempt (depending on the amount) cash. As a bankruptcy attorney in Detroit, Michigan, I never like to see a client who has given in to the urges of a bill collector and taken a withdrawal from a protected retirement account to pay a debt that could have easily been discharged in a routine bankruptcy case.
DON’T take a mortgage or home equity line of credit on your home to pay unsecured debt (i.e. credit card, utility or medical bills).
Similar to the above scenario, you are paying a creditor that likely could be easily discharged with a personal bankruptcy filing. If a creditor convinces you to take out a second mortgage or home equity line of credit against the equity in your home, you are likely converting debt which would have been discharged in bankruptcy (unsecured debt) into debt which you will have to pay or face foreclosure of your home (secured debt). Unfortunately I have had many a client who prior to seeing me, gave into the pressures of the collection agents and took equity out of their home to pay credit card debt only to be unable to afford the additional mortgage payments eventually resulting in a foreclosure of their home.
DON’T pay $600 or more back to family members, relatives or business partners that you owe.
This is an all too common scenario in bankruptcy and one that is difficult for many clients to understand. Bankruptcy is not only a law to help debtors (the person or married couple filing the case) obtain a discharge of their debt, but it is also meant to be fair to creditors meaning that if there exists some asset that a bankruptcy trustee can recover for the benefit of creditors, that the distribution to the creditors is fair and uniform. That is why a bankruptcy trustee will ask you if you have made a payment amounting to a total of $600 or more to what is called an “insider” (which generally includes relatives and business associates) that took place within the one year period before you filed bankruptcy. These transactions are quite common due to the fact that many of my clients are struggling for some time before they ultimately decide to file a personal bankruptcy case and during the time period leading up to the filing, family members have been kind enough to help out the individual or couple who ultimately file.
Eventually, my clients receive a tax refund one spring and have the money to pay back their mom or brother and also the funds needed to file their bankruptcy. Well, if you paid a family member back within the one year period before you file, this is referred to as a bankruptcy “preference.” You “preferred” this creditor (mom) over your other creditors (Capital One) which is unfair. Remember, justice is blind. In the eyes of the bankruptcy court, your mother who loaned you money to get through a rough patch in your life, and your credit card company, Capital One, who did the same, are equal in status. Both are simply unsecured creditors to whom you owe money. The bankruptcy trustee may recover preferences from the person that was paid prior to filing (mom), and divide the money between all of your creditors. (Payments of $600 or more to any other “ordinary” creditor within 90 days before the case is filed is also a preference.)
DON’T transfer real or personal property such as a home or car you own into someone else’s name to avoid it being taken by your creditors or the bankruptcy trustee.
That kind of transfer is considered a fraudulent transfer as to your creditors and can result in your discharge being denied by the bankruptcy court. Additionally, the bankruptcy trustee can also take the property from the person to whom it was transferred.
DO provide my office with the Documentation Needed to File your Bankruptcy Case
The Bankruptcy Trustee must review certain documentation regarding your income and assets when filing a Chapter 7 Bankruptcy in Michigan. My office will need your last 2 years Federal income tax returns, 60 days most recent pay-stubs if you are employed, 3 months most recent bank statements, titles to vehicles and real estate documents if you own real estate. In a Chapter 13 Bankruptcy case, we generally only will need 6 months pay-stubs or other proof of income and your last 2 years Federal income tax returns. For a more detailed list of those documents needed see my page Documentation needed if you are filing Bankruptcy in Michigan.
POST-FILING BANKRUPTCY DOS AND DON’TS
If my office has already filed a Chapter 7 Bankruptcy for you there are some important Dos and Don’ts which come into play during the pendency of your case until it is discharged and closed.
DO continue to make your payments on vehicles which you intent to keep.
Creditors, whose loans are secured by collateral, such as your car or truck, have the ability and will usually repossess the vehicle without notice to you anytime you are in default in your payments, especially if you reach the 3 month delinquency point. It takes longer for other creditors (including those secured by other property such as your house) to take legal action on a debt that is in default.
DON’T Sell, Transfer or give away any assets or property you have without contacting me first.
The moment you file your Chapter 7 Bankruptcy petition, a “Bankruptcy Estate” is created. This means that all of your property temporarily during your bankruptcy case comes under the control of your bankruptcy Trustee whose job it is to liquidate any non-exempt assets (assets that are not protected by the bankruptcy laws as the basis for your fresh start). In 99% percent of my cases, nothing is taken and sold to pay creditors, but at the beginning of the case and until the trustee completes his or her investigation of your assets, the bankruptcy estate must be held intact. This is why until the conclusion of your case which generally takes about 4 to 6 months, you should not sell, transfer, give away or otherwise dispose of any property of value without asking me, your bankruptcy lawyer who will run it by the Trustee.
DO Make sure to Complete the Mandatory Debtor Educational Course so your Bankruptcy Judge can Grant your Discharge.
The Federal Bankruptcy laws require you complete a pre-filing bankruptcy briefing as well as a post-filing Debtor Educational Course which can be completed online or on the phone in about two hours. My office will set this up for you and allow you to use our computers if you don’t have access to one. The course is real easy and covers basic personal financial topics such as money saving tips, how to improve your credit after bankruptcy, negotiating interest rates with future lends and finance companies, etc. My past clients have provided positive feedback after taking the course, and no client of mine has ever failed to pass the test and are always issued the certificate of completion after fulfilling all requirements.
DO Notify my office if you Anticipate an Inheritance or expect a Property Settlement stemming from a Divorce or become a Beneficiary under a Life Insurance policy within 180 days of Filing Bankruptcy
Your Bankruptcy Estate includes your existing assets as well as that property recovered by your bankruptcy trustee, and it also can include certain property that you become entitled to within 6 months of the filing of the petition that you inherit or acquire through a property settlement pursuant to a divorce or legal separation, or through as a beneficiary of life insurance. The trustee in a bankruptcy case is the representative of the estate and has a fiduciary duty to the creditors of the estate. In these relatively rare circumstances, we need to notify the trustee and will need to amend the bankruptcy schedules and possibly amend exemptions to protect all or a portion of the property.
See my blog post on Chapter 13 Bankruptcy Case Do’s and Don’ts
DO give my Name, website address and phone number to any friends or family members. A referral from a happy client is the best compliment I can get!! Tell them to call for a free start-up packet by calling 888-4WALTER toll free or 313-962-4656. Feel free to email me at firstname.lastname@example.org