Considering Filing Bankruptcy? These Dos and Don’ts Will Go a Long Way Toward Ensuring Your Bankruptcy Case Goes Smoothly
First, let’s start with the things you should do now if you are considering filing a personal Chapter 7 or Chapter 13 bankruptcy:
Start Gathering Your Paystubs Now. Your bankruptcy attorney will need to average out your monthly income for the six month period leading up to filing your bankruptcy petition. Even if you get paid by direct deposit, your employer’s payroll office can get you PDFs or hardcopies of past payment advices.
File All Tax Returns. Even if you cannot afford to pay your taxes now, go ahead and file any returns that you have not filed. In some instances, income taxes owed to the IRS may be treated as “non-priority” and/or dischargeable depending on whether you file a Chapter 7 or a Chapter 13 bankruptcy, but certain time periods must run from when the taxes were originally due—and importantly—from when you actually filed the return.
Gather Your Most Recent Statements. Your bankruptcy attorney will need the most recent statement for your checking and savings accounts, other financial accounts such as IRAs, 401(k)s, whole life insurance policies, etc. Same thing with your credit accounts: get your mortgage loan statement, your car loan statement, your personal loans and credit card statements all together.
If You Owe Back Taxes. Contact the IRS and the California Franchise Tax Board and request Tax Account Transcripts for each year that you owe. These will be very important for your bankruptcy attorney to be able to determine how your bankruptcy case will treat your tax debts.
Prepare Profit-and-Loss Statements if You Are Self-Employed. If you run your own small business and you don’t use accounting software to manage your business, now is the time to start! The bankruptcy trustee assigned to your case will require monthly “P&Ls” to show your business income and expenses.
Obtain an Appraisal or Broker’s Price Opinion if You Own Real Estate. Whether you file a Chapter 13 or a Chapter 7 bankruptcy, you’ll need to prove the value of your home. An assessed value from the county for property tax purposes will not be accepted. Generally, this information must be current and not older than six months before you file your bankruptcy case.
Get a Title Report for Your Property. If you own real estate and have ever been sued (whether you know it or not), there may be judgment liens (called “Abstracts of Judgment”) attached to your property. These do not come off in bankruptcy without a separate motion.
Next, let’s look at some things you should definitely NOT do prior to filing bankruptcy:
Don’t Hide Assets! You must disclose everything you own—no matter where it is. Intentionally hiding or failing to honestly disclose everything you own can result in denial of your discharge. This even includes your right to sue someone.
Don’t Transfer or Give Away Assets! If you for transfer anything of value to anyone for less than “reasonably equivalent value” within two years before you file bankruptcy, a Chapter 7 trustee can recover or “claw back” the asset from the third party. In a Chapter 13 bankruptcy, you may have to pay more into your plan based upon that asset coming back “into the estate.” And if you transfer an asset with the intention of hiding it from your creditors, the “look back period” can go back up to seven years in California, and your bankruptcy discharge can be denied altogether! Note: “fraudulent transfers” can be reversed in California. Read about it here.
Don’t Pay Back Family! Never repay a debt that you owe to a family member or business associate within one year before you file bankruptcy. This is called a “Preferential Payments to an ‘Insider.’” If within one year before filing bankruptcy, you pay back a loan made to you by a family member, then a Chapter 7 bankruptcy trustee can demand that your family member give the money back to the trustee. In a Chapter 13 bankruptcy, while your family member won’t be contacted, you may have to pay more into your plan based upon that money coming back “into the estate.” Note that an “insider” in the consumer bankruptcy context is most often a family member of the debtor, but can also be a business associate.
Don’t Run Up New Debts! If you are unable to make your monthly credit card or other loan payments, and think you may need to file bankruptcy, then by all means don’t go shopping with your credit card. Doing so, especially if you purchase “luxury goods or services” or make charges outside your ordinary spending pattern can give your creditors ammunition to block the discharge of such debts.
Don’t Withdraw from Retirement Accounts! Funds from held in a 401(k) or IRA are some of the most protected assets in bankruptcy. This is especially important if you need to file a Chapter 7 bankruptcy, in which some of a debtor’s assets may be liquidated by a trustee. As long as the funds remain in these exempt accounts, they’re protected, but once you take them out and place them in a regular checking or savings account, they may fair game for taking by a Chapter 7 trustee. In Chapter 13 bankruptcy, even though no assets are liquidated by a trustee, the more non-exempt assets a debtor has, the more he or she will have to pay to creditors. Bottom line: don’t withdraw from retirement accounts prior to filing bankruptcy if you can possibly avoid it!
