Planning for Bankruptcy: Dos and Don’ts

Summary: When planning for bankruptcy, be sure to consult with an attorney early. There are numerous things you should and shouldn’t do.

The most critical thing you can do is consult with a bankruptcy attorney early. The attorney can help you identify potential problems. Planning for bankruptcy before filing is essential so you won’t lose property or have trouble after you file. Before you file bankruptcy, you may want to consider these dos and don’ts:

What to Do Before You File Bankruptcy

• Get organized.
• Change bank accounts if you owe any money to your bank, if even you plan on paying that debt back
• Keep funds such as social security benefits and veterans benefits in a separate account. Social security offers a Direct Express Card where your social security benefit payment is placed directly on this card. Both in and out of bankruptcy, these funds cannot be garnished by most creditors.
• Keep life insurance proceeds in a separate account. Don’t mix other money in with these funds which generally have their own exemption. Rearranging your bank accounts can be complicated.
• Try to stay current on essential, secured debt, such as your home and car
• Be prepared to account for how you have spent any windfalls of cash
• Consider paying non-dischargeable debt, such as certain taxes — talk to your attorney about timing
• Get all your tax returns filed

What Not to Do Before You File Bankruptcy

• Don’t struggle for years — get help early.
• Don’t gift or sell any major assets to close friends or family members. You may be able to sell to a close friend or family as long as you sell for market value. Be able to show how you came up with the sales price. Make sure the sales funds are deposited in your bank account.
• Don’t repay loans to family members or friends.
• Don’t pay off or pre-pay your home, cars, or other debt. You should pay your regular payment.
• Don’t liquidate an IRA, 401(k), or other pension plan. These accounts are usually exempt (protected in bankruptcy) until you remove the money from the IRA, 401k, etc. Cash (money in or out of the bank) will have a limited exemption (except for certain types of funds kept in a separate account.)
• Do not change the legal entity status of your business until you consult with an attorney.
• Don’t make new credit card charges or loans.

Even if you own assets you can’t protect, an experienced bankruptcy attorney may help you with pre-filing planning. With planning, you may be able to keep your property while being honest and staying within the law. What creates problems for people is not being upfront. Problems can be dealt with. You just need to be sure your attorney knows about everything. There are usually workarounds, such as waiting a certain time period to file.

Want to learn more about bankruptcy and strategies to overcome debt?

Chapter 7 Bankruptcy – Best if wiping out credit card or signature loans will help. Cheapest, fastest bankruptcy, but can’t help you catch up on past due mortgage or vehicle loans.

Chapter 13 Bankruptcy – Best if need to catch up on long term debt, such as mortgage or vehicle.

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