A lot of people find themselves struggling to pay their bills everyday. Even if you are not immediately considering bankruptcy, if you are struggling to make these payments, it is important to understand that bankruptcy may be the best option for you either immediately or in the future. Doing something wrong before you file bankruptcy could jeopardize your bankruptcy and could even cause you much more serious issues.
- Overtime Should be Used with Caution
When someone is considering bankruptcy protection, be very cautious with overtime. The bankruptcy court will assess your income over the last 6 months to determine your ability to pay your debts. Some people work overtime for a short period of time in order to try to pay their debt or save up money to pay for their bankruptcy attorney's fees. Working a lot of overtime may make you ineligible for certain types of bankruptcy protection if it pushes your income up too far. Instead of working to pay outrageous attorneys fees, it might be better to find a lower cost solution, such as a bankruptcy petition preparer to help you with your bankruptcy filing.
- Don't Borrow Money from Friends and Family
The court considers these people creditors, no different than Capital One. You can't tell the court, "I want to pay my mom because I love her, but I don't care about my credit card company." These debts will be treated like any other debt and it might cause a rift in the family.
- Don't Pay Back Friends and Family
Payments to friends and family are considered preference transfers. If you made a payment to a creditor (including friends and family) in the year before your bankruptcy filing, the trustee may sue that creditor to recover the money. The rationale is simple, everyone must be treated the same. If you paid me $5,000 and didn't pay anyone else anything else, it simply is not fair to those that you didn't pay anything to.
- Don't Transfer Property Out of Your Name
Some people lose property in a bankruptcy. To avoid this, often people will transfer their assets out of their name and into someone else's name. There are 3 problems with this, first it is a preferential transfer and the other person will be sued by the trustee to get the property or monetary equivalent back. Second, once the trustee has recovered the money or property, you cannot exempt it. This means that if you had kept it in your name, you may have been eligible for an exemption that you are no longer entitled to after the transfer. Finally, the Court may move to dismiss your case, or in limited particularly egregious cases, charge you with bankruptcy fraud, a felony.
- Don't Raid Your 401(k)
401(k) and retirement accounts generally are almost universally protected from the Bankruptcy code. This means that the assets in the account are yours and no creditor or bankruptcy court can generally access them. Unfortunately, many people raid these accounts when they are in financial trouble trying to stay afloat. Most still end up in bankruptcy, but without their retirement account. Does it really make financial since to throw away your retirement to pay credit card bills?
Also, don't forget about the tax consequences of taking this money. If you are under 65 years of age, withdrawals are taxed as income PLUS you get a 10% penalty. I have seen people who normally get $5,000 back at tax time suddenly owe thousands of dollars in taxes because they took money from their retirement account. So in addition to losing your retirement, you lose your tax refund, and now you have to file bankruptcy and figure out how to pay Uncle Sam.
- Don't Change Your Tax Withholdings
Another action that a lot of people take when they are trying to get more money is changing their tax withholdings on their paycheck to stop or substantially reduce the amount of money being taken from their paycheck. This can cause a couple of problems. The first problem is obvious: at tax time, you will owe Uncle Sam money that you still can't afford to repay. Eventually, your paycheck will be garnished by the IRS and you will be left without a paycheck. I once helped a Nurse that made about $100k per year after the IRS garnished her check and left her with just $80 for a two week period. Don't let that happen to you.
The change of your tax withholdings may also prevent you from filing bankruptcy in the future. The Court reviews your income and necessary expenses (including tax withholdings) for the last 6 months to determine whether you can afford to pay your debts. Without this major expense, you may eliminate some of your bankruptcy options.
- Avoid Credit Cards and New Debts
Creditors who have recently extended you credit may claim that you obtained the credit with the intent of filing bankruptcy. When you obtain credit, you must have a reasonable expectation that you will be able to pay it back. If you use a credit card then file for bankruptcy protection, the creditor may claim that you fraudulently obtained the credit and had no intention of paying it back. The longer the period between the last use on your credit cards and the filing of your bankruptcy petition, the better.
- Don't Pawn the Title to Your Car
This is plain painful to see. If you are paying unsecured credit cards at 10-30% interest with a secured title pawn with an interest rate of 100-200% interest, you are hurting yourself. In addition, title pawn companies can take your car if you do not renew or pay off your title pawn within 30 days. Forget trying to hide your car, they won't look too hard for it, they simply charge you with theft (a felony). If you file for bankruptcy protection, you will either need to keep the loan sharks loan or surrender the car.
Simplified Document Solutions is a congressionally designated debt relief agency. We help people obtain debt relief under the U.S. Bankruptcy Code. Simplified Document Solutions is BBB Accredited and has an "A" rating with the Better Business Bureau. We have offices in Conyers, Georgia and College Park, Georgia where we give good people who have run into hard times a fresh financial start for a low fee of only $249. Please contact us at 678-490-5841 to schedule your free consultation.
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