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When you are thinking about filing for bankruptcy relief, the steps that you take in the weeks and months before filing a bankruptcy petition could impact the outcome of your bankruptcy case. Let’s discuss some of the things that you should do before filing bankruptcy, and a few things to avoid.

General Things to Consider Before Filing for Bankruptcy Relief

A few things to consider before filing for bankruptcy relief include:

1) Is there a bankruptcy alternative that works better for you?

Some individuals with low debt amounts and sufficient income could benefit more from a non-bankruptcy debt relief option. For example, the Savvy Method, which is a data driving debt payoff method, combines the best techniques of two of the most commonly used methods of paying off debts to help you become debt-free without bankruptcy. The Savvy Debt Payoff Planner helps you organize your finances and manage your debts to pay them off quickly and efficiently.

Debt consolidation and debt settlement can also be used to pay off debts without bankruptcy. However, there are drawbacks to those methods that can be costly in the long-term. For instance, creditors are not required to work with you outside of bankruptcy. In a bankruptcy case, creditors are bound by bankruptcy laws.

Comparing the pros and cons of each debt relief method is the best way to decide if bankruptcy is right for you. 

Do you meet the income qualifications for Chapter 7?

Chapter 7 is a quick and affordable way to get out of debt. However, you must meet the income qualifications for a Chapter 7 case. If your income exceeds the median income for your state, you may not be able to discharge debts in a Chapter 7 case. You may need to file under Chapter 13.

Do you need to file under Chapter 13?

In some cases, a person needs to file a Chapter 13 case instead of a Chapter 7 case. Chapter 13 cases can help you save your home from foreclosure and make keeping your car more affordable. If you have debts that are not dischargeable in bankruptcy, such as back child support, back alimony, or tax debts, a Chapter 13 case may be better for you than a Chapter 7 case.

Is any of my property at risk if I file a Chapter 7 case?

Bankruptcy exemptions protect some of your property from being liquidated to repay your debts. However, some individuals may have property that exceeds bankruptcy exemptions. If so, that property could be at risk of being sold by a Chapter 7 trustee. In a Chapter 13 case, you could keep that property by paying a little extra to your creditors through the Chapter 13 plan.

You can learn more about bankruptcy exemptions in our blogs about cash in a Chapter 7 case and how the homestead exemptions works.

Do you need a bankruptcy attorney to file for bankruptcy relief?

You can file bankruptcy without an attorney, but that does not mean you should do so. Bankruptcy law is complicated. If you make a mistake preparing your bankruptcy forms, you could lose property in a Chapter 7 case, fail to receive a bankruptcy discharge, or pay more than necessary in a Chapter 13 plan. Many things could go wrong.

Most bankruptcy attorneys offer free consultations. Therefore, it does not cost you anything to get advice about bankruptcy options from a skilled bankruptcy lawyer. 

Understanding the Lookback Period for Chapter 7 

When you file for bankruptcy relief, the Chapter 7 trustee reviews payments made to insiders. Insider creditors include family members, business partners, or family members of business partners. The lookback period for payments to insiders is one year before filing for bankruptcy relief. If you paid an insider within one year, the Chapter 7 trustee can “claw back” or recover that payment for the bankruptcy estate. 

The trustee files an adversary proceeding (a lawsuit) against the person you paid. The clawback lawsuit demands that the person pay the money to the bankruptcy receipt. If the money is not returned, the trustee can obtain a judgment to pursue under state law.

The lookback period in Chapter 7 for the transfer of property is two years before the filing date of the bankruptcy petition. The Chapter 7 trustee can review any transfers of property you made within the past two years to determine if the transfers were fraudulent. 

Fraudulent transfers are typically gifts of property or sales of property for less than fair market value. For instance, you sell your boat to your friend for half of the value 11 months before filing for bankruptcy relief. The trustee can sue your friend to “undo” the transfer by requiring the friend to turn over the boat or pay the estate for the fair market value of the boat. In some cases of fraud, a trustee could go back further than two years, but these cases are rarer.

Can I or Should I Max Out My Credit Card Before Filing Bankruptcy?

You can use your credit cards before filing for bankruptcy, but it is usually best to stop using your credit cards when you decide to file a bankruptcy case. Continuing to use credit cards could result in some of the debt being non-dischargeable in the bankruptcy case. Whether you can get rid of recent bankruptcy charges depends on why the credit card was used, the amount of charge, and the date of the charge.

In most cases, any credit card purchases of more than $650 for luxury goods or services on a single credit card within 90 days of filing bankruptcy are considered presumptively fraudulent. The same is true for any cash advances of more than $950 within 70 days of filing bankruptcy. Those debts are presumed to be non-dischargeable in bankruptcy. You must pay those debts despite your bankruptcy filing. 

When should you stop using credit cards before filing bankruptcy?

Most bankruptcy lawyers tell clients to stop using their credit cards immediately if they are serious about filing for bankruptcy relief. You do not want to risk having any of the credit card debt being declared non-dischargeable. Furthermore, dealing with allegations of fraud complicate and lengthen the bankruptcy process. 

What Should You Not Do Before Filing Bankruptcy? 

Let’s review what you should not do before filing bankruptcy:

  • Don’t repay friends or other insider creditors. You can voluntarily repay those debts if you desire AFTER your bankruptcy case is closed.
  • Don’t transfer property or sell property without discussing it with your attorney first. You might be able to sell an item and use the funds for ordinary expenses before filing bankruptcy, but talk to an attorney first.
  • Don’t use credit cards within three months of filing bankruptcy. Small charges for necessary expenses may be okay, but talk to your attorney first.
  • Don’t pay debts that will be discharged. If you are unsure, talk to your attorney.
  • Don’t withdraw funds from your requirement or equity line without talking to an attorney. Bankruptcy exemptions protect most retirement accounts and the equity in your home. Withdrawing those funds could result in losing that protection. 
  • Don’t try to hide assets, move assets, or give them away to friends or family members.
  • Do not apply for new loans or lines of credit.
  • Don’t file if you are about to receive an inheritance, tax refunds, or other significant asset or amount of money without consulting with an attorney.
  • Do not fail to file your income tax returns. Bankruptcy laws mandate that you file all required tax returns.

Do You Stop Paying Bills Before Chapter 7?

If you are going to file Chapter 7, you can stop paying unsecured debts that will be discharged in the Chapter 7 case. Unsecured debts that are typically discharged in Chapter 7 include medical bills, credit card accounts, and personal loans. 

However, if you want to keep your car and home, you need to continue paying your loan payments. Also, alimony and child support are not dischargeable in bankruptcy, so keep paying those payments. Most student loans and tax debts are also not dischargeable, but talk to a bankruptcy lawyer. In some cases, old tax debts and student loans could be discharged in bankruptcy. 

Get Help Filing a Bankruptcy Case From A Bankruptcy Attorney Near You

If you need help filing a bankruptcy case, contact Ascend. Call or text us at 833-272-3631 if you have questions or want more information about filing bankruptcy. 

Post Author: Ben Tejes

Ben Tejes is a co-founder and CEO of Ascend Finance. Before Ascend, Ben held various executive roles at personal finance companies. Ben specializes in Chapter 13 Bankruptcy, Debt Settlement, Chapter 7 Bankruptcy and debt payoff methods. In his free time, Ben enjoys spending time going on adventures with his wife and three young daughters.

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