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5 Mistakes People Make before Filing for Bankruptcy


If done right, bankruptcy can provide you with a fresh financial start and a new outlook on life. However, we have seen people commit some common errors before filing. These mistakes can cause the court to reject your bankruptcy petition, and they can be costly to fix. Before filing for bankruptcy, make sure to avoid these common mistakes.

Mistake # 1: Using a Home Equity Loan or Retirement Funds to Pay Down Debt 

Some people are so afraid of bankruptcy that they will do anything to avoid it—including harming their financial future. In order to pay down bills, they take out a home equity loan or home equity line of credit (HELOC) or else they raid their retirement accounts. These are big mistakes you should avoid.

Credit card and medical debt are generally unsecured, meaning no assets backs them up. If you default, your creditors receive nothing in return. By contrast, a HELOC or home equity loan is backed by your home, so if you default your credit can foreclose on the property. By paying off unsecured debt with a home equity loan, you risk losing your home if you default on the debt.

Furthermore, it is very difficult to rebuild retirement savings, especially if you need to pay an early withdrawal penalty to access the funds. Instead of compromising your financial future this way, talk with a lawyer about whether a bankruptcy can help you manage your debts.

Mistake # 2: Transferring Assets Right Before Filing 

In a Chapter 7 bankruptcy, you get to wipe out unsecured debt like credit card or medical debt. In exchange, the trustee can sell your property, subject to certain exclusions. Some people, hoping to preserve assets, try to sell or give away property right before filing for bankruptcy. This is a huge mistake. The trustee who runs your bankruptcy will consider the transfer fraudulent and seek to get the property back.

Mistake # 3: Omitting Assets from Your Bankruptcy Paperwork 

This mistake is a lot like mistake # 2. A debtor contemplating bankruptcy might be afraid that they will lose property, so they think, “I will just leave this asset off my bankruptcy petition.” Unfortunately, if you get caught, you will have committed fraud and the judge can dismiss your bankruptcy petition. It is also illegal to lie to the court in your filings.

Mistake # 4: Running Up Credit Card Debt Before Filing 

The bankruptcy trustee will carefully scrutinize any purchases or cash advances you make with your credit cards immediately before filing for bankruptcy. The trustee is looking for fraud, under the theory that you ran up debt knowing you could never pay it back. In the following situations, you are presumed to have acted fraudulently:

  • Buying more than $675 in luxury goods or services in the 90 days before you file for bankruptcy. Luxury goods and services are typically anything that isn’t necessary.
  • Obtaining a cash advance of more than $950 in the 70 days before filing for bankruptcy.

If you used your credit cards in this manner, you should discuss the situation with your bankruptcy attorney.

Mistake #5: Filing for Bankruptcy without a Lawyer 

You might hope to save some money by filing on your own, but you will dramatically increase your chances of making a mistake on your petition. Mistakes are not impossible to fix, but they are time-consuming and costly. If the judge rejects your petition, you’ll need to file again—as you watch your debt load continue to mount.

At Nowack & Olson in Plantation, we can take the stress out of filing for bankruptcy and have you on your way to financial freedom. Contact us today for your free consultation.




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