Thinking About Bankruptcy? 6 Things to NOT Do

Bankruptcy can be a frightening prospect, but the truth is it offers a fresh financial start with a legal process that isn’t as complicated as you may think. Despite this, you need to be sure you follow all California bankruptcy rules, meet all deadlines, and avoid mistakes that can complicate your case or even get your bankruptcy case dismissed.

The following are the most important mistakes to avoid to ensure a smooth, easy bankruptcy filing.

#1. Don’t try to pay off creditors first
Sometimes people who are struggling and considering bankruptcy try to make their case look better (or improve their credit or cash flow) by paying off one of their creditors. Remember that any unusual or out-of-the-ordinary payments to pay off a creditor can damage your case. This is known as a preferential transfer and it means that creditor was given preference over other creditors who hold the same weight under the law. In most cases, your bankruptcy trustee will use a claw back lawsuit to get the money returned from the creditor so it can be distributed more fairly under California bankruptcy law. This will delay your bankruptcy filing and discharge.

#2. Don’t use your credit cards
Once you decide to file for bankruptcy, stop using your credit cards. If you charge more than $675 within 90 days of filing on luxury goods and services, fraud will be presumed. Fraud is also presumed for cash advances of more than $950 within 90 days. In any case, running up a balance on your credit cards soon after filing bankruptcy can make the debt nondischargeable, which means you will still need to repay the debt.

#3. Don’t touch your retirement accounts
Even if you are struggling financially, it’s a bad idea to liquidate or withdraw money from a retirement account before bankruptcy. This is because retirement accounts are typically protected, allowing you to discharge your debt and keep the funds in your qualified retirement account free and clear.

#4. Don’t transfer property
The bankruptcy trustee can undo property transfers if you attempt to give away or sell belongings ahead of bankruptcy. The trustee can even undo transfers made up to two years before you filed for bankruptcy if it was done in an attempt to defraud, delay, or hinder a creditor.

#5. Don’t deposit extra money in your account
The only money that should go into your bank account should come from your job or a source of income. Do not deposit a check from a friend or money that belongs to anyone else, even if a loved one is trying to help you with a financial shortfall by gifting or loaning you money. Likewise, make sure all business transactions and personal transactions are kept separate. This will avoid the appearance of fraud and avoid claw back lawsuits by the trustee.

#6. Don’t file any lawsuits
When you file for bankruptcy, all of your assets are transferred to the California bankruptcy court. This includes current and future payments from any lawsuit. You will not be able to receive money awarded to you, even if the legal case has not been resolved yet or if the settlement amount has not been determined. Any legal claims you may have that are not yet filed in court are also transferred to the bankruptcy court. There are some California exemptions for specific types of settlements up to a limit, but filing a lawsuit can complicate your bankruptcy case. Make sure you consult with an experienced Los Angeles bankruptcy lawyer if you believe you have any claims.