If you know you are going to be filing Chapter 7 bankruptcy in the future then there are some actions that you’re going to need to avoid taking to ensure that your case smoothly. 

Here are five issues that can cause problems for Chapter 7.

Side Hustles

When you get into financial distress you might be tempted to take a second job, work a lot of overtime, or take side gigs to try to relieve the financial stress. Yet by the time you’re filing for bankruptcy you’re well past the point where you’re likely going to be able to pay these items off with additional work.

In addition, taking this work could prevent you from passing the Chapter 7 means test. 

Remember, your goal is to discharge the debt, and if you have to go to a Chapter 13 you’ll end up having to pay into a payment plan so that some of those debts get paid off. That will mean your debts will be discharged in 3 to 7 years, but in a Chapter 7 they’d be discharged as soon as your case ends, typically in 9 months. 

For some Chapter 13 really is the right decision, but others will want to avoid bringing in more income for now. 

Paying Off Friend and Family Member Loans

It’s natural to want to try to protect your friends or family members, or even to try keep them from finding out that you’re filing bankruptcy. Unfortunately, paying them back will do the opposite.

The courts will rule that they were creditors who received “preferential treatment” from you. If you pay any friend or family member a year prior to your Chapter 7 the trustee can sue them to recover that money, putting it back into the estate and distributing it to all of your creditors. That’s anything but protection, especially if the trustee gets to them after they’ve already paid all that money off.

Instead, you need to list each friend and family member debt on your bankruptcy schedule with all of your other debts.

Transferring Assets

You have to disclose any asset you’ve sold within the past 2 years. Each of these assets must be a legitimate sale. That is, if you sold a boat worth $3000, you got roughly $3000 for it. Note the courts will scrutinize purchases by friends and family members much more closely, so you need to be able to provide some sort of proof that you received an appropriate amount for the sale.

It’s all too common for people to think they’re fooling the bankruptcy courts by “selling” an asset to a family member who is supposed to return it to them later.

This is illegal and it’s not even necessary. You can almost always protect all of this property by using the federal or New York bankruptcy exemptions. 

Using Credit Cards

If at all possible you want to stop using your credit cards at least 90 days prior to filing for bankruptcy. If the court deems any of your purchases to be “luxury” purchases then they can deem those specific amounts as non-dischargeable and you’ll still owe them after your bankruptcy. You also want to avoid cash advances exceeding $1000.

If you must use your credit cards for survival purposes be very sure you’re using them for utilities,  food, or medical expenses. Avoid cash advances altogether as it’s harder to prove what you spent that money on.  

Pulling Money out of Retirement Accounts

Don’t pull money out of your 401(K) or IRA to pay off debts. Creditors love to intimidate people into doing this, but you’re just going to trigger tax consequences, miss out on the compound interest you could have been earning, and put your retirement at risk.

You’d be surprised to learn how well-protected retirement accounts really are during the bankruptcy process. Our government wants to encourage people to retire and to retire well. Your bankruptcy attorney can help ensure this money remains untouched.

Need help?

If you know that bankruptcy is your most likely option for protecting your family financially then don’t wait. Reach out to Simon Haysom, LLC to schedule a free one hour consultation.

See also:

How to Choose the Right Bankruptcy Chapter

How Often Can You File Bankruptcy in New York?

How Will Bankruptcy Impact Your New York Retirement Account?