4 Common Mistakes Made During A Bankruptcy
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In A Nutshell
1) Incur Debt
2) Withdrawal From Retirement
3) Transfer Property
4) Failure To Disclose Change In Circumstances
In More Detail
1) Incur Debt
There are many pitfalls that you can unknowingly run into during a bankruptcy that can have severe consequences for your case. Due to the complexity of the rules restricting you while in a bankruptcy, it is of the utmost importance that you hire an attorney to represent you in your bankruptcy case. Complete our online intake form to get this process started.
One of the most common mistakes individuals make during a bankruptcy is incurring debt. The Bankruptcy Code forbids anyone in a bankruptcy from incurring debt during the bankruptcy case. Incurring debt can come in many forms, but the most common post-petition debts that I see are: financing a vehicle from a buy-here-pay-here dealership, payroll advances from an employer, and small loans from family members.
Consequences. Incurring debt during a Chapter 7 bankruptcy can result in your case being dismissed before receiving your discharge…meaning that your debts do not go away. You will still have filed bankruptcy which will damage your credit. But you will not have the benefit of your debts being wiped away. You will get the “bad” of bankruptcy without getting the “good”. In a Chapter 13 bankruptcy, you could have your case dismissed prior to receiving your discharge (like a Chapter 7). Another possible consequence in a Chapter 13 is an increase in your monthly bankruptcy payment. The increase in payment is one way to punish you for your actions, as well as, force you to pay more towards your unsecured debt. Obviously, this could result in your bankruptcy payment becoming unaffordable forcing you to get dismissed from your case.
What If You Need To Incur Debt? There may be times during your bankruptcy that you need to incur debt. A Chapter 13 bankruptcy can last for 5 years. During this long period of time, situations or emergencies may arise that require you to incur debt. Common examples of this include: financing a new HVAC system because your old one has died; financing a new vehicle; paying for a funeral. You can incur debt to pay for necessities during a bankruptcy if the Court says you can first. This requires a motion to be filed in your bankruptcy case. Your attorney will then go in front of a judge and explain why it is necessary for you to incur debt. If the judge agrees, then you are allowed to incur debt up to certain limits established by the judge.
Non-Filing Spouse. Many bankruptcies are filed by only one spouse because all of the household debt is in his/her name. Whether you and/or your spouse should file bankruptcy is a very good question to ask your attorney when you are contemplating filing bankruptcy. I will speak more on this topic in a later post. But, if you file a bankruptcy and your spouse does not, then your non-filing spouse is not bound by any of the restrictions of your bankruptcy. Your spouse can incur debt in his/her name for the benefit of your household as long as you do not co-sign for the debt.
After The Bankruptcy. The restrictions placed upon you by the Bankruptcy Code terminate when your bankruptcy ends. Individuals I speak with often believe that filing bankruptcy keeps you from incurring debt for 7 to 10 years. This is not true. Bankruptcy will remain on your credit report for this period of time, but you will not be restricted by the bankruptcy from incurring debt once the bankruptcy is complete. Obviously, once the bankruptcy ends you should cautiously incur debt if needed. Your slate will be wiped clean as a result of the bankruptcy, and it is not advisable to immediately take on more debt than you can handle.
2) Withdrawal From Retirement
I could have talked about withdrawing from your retirement in the section above, but because it is such a common mistake made by individuals in bankruptcy I decided to give it its own section. Withdrawing from retirement can create the issues of having more disposable income which could increase your bankruptcy payment, creating a liquidation issue in your case, or be considered a loan which must go through the proper approval process before incurred.
Bankruptcy Payment. Sometimes during a Chapter 13 bankruptcy, individuals because of their age or otherwise begin to receive monthly distributions from their retirement. This is not always an issue but could be if the individual’s monthly income substantially increases as a result. In most situations like this, the individual retires from employment, begins to receive monthly retirement distributions, and sees no net increase in their income. This has no effect on their bankruptcy. In other situations, the individual begins to receive retirement distributions in addition to their employment income. This increase in income must be reported to the Bankruptcy Trustee and could result in the individual having more monthly disposable income leading to an increased bankruptcy payment.
Liquidation Issue. Most funds held in a retirement account (i.e. 401(k), 403(b), IRA) are exempt in bankruptcy. This means that while funds are held within a qualified retirement account, the Bankruptcy Trustee cannot take the funds and use them to payoff some of your debt. Rather, the retirement account will remain intact during and after the bankruptcy. BUT, if the funds are withdrawn from the account and paid to you in cash, then they are no longer exempt. In a Chapter 7, the Trustee could take the unexempt funds and use them to pay off your debt. In a Chapter 13, the Trustee could force your monthly bankruptcy payment to increase to pay a higher percentage to your unsecured creditors.
Retirement Loan. One common problem that I have seen in bankruptcy cases is individuals taking out a loan with their retirement accounts without first seeking the proper approval. Individuals in bankruptcy often need to tap into their retirement savings to make necessary purchases or repairs (i.e. new HVAC unit for their residence, repair roof damaged by a storm, etc.). A retirement loan does not “feel” like a traditional loan because the individual is not getting funds from a bank or finance company. Rather the money is being borrowed from the individual himself. In the eyes of the Bankruptcy Court, this type of transaction is viewed as a loan in the same vein as a personal loan from a bank. The individual must seek approval from the Bankruptcy Court before taking out a loan from his retirement account. Not doing so, could result in the same consequences mentioned above.
3) Transfer Property
During a bankruptcy, you cannot transfer any property that you own. Upon the filing of bankruptcy, an “Estate” is created comprising of all of the property you own or have an interest. This Estate is protected by the Bankruptcy Code. Assets are not able to be removed from this Estate during your case without the Court’s approval.
Assets. Most Trustees and Judges (in my experience) are not concerned with you having a yard sale, selling household goods and knickknacks. Rather, they have an issue with the sale of a vehicle, real estate, and other “big ticket” items. The proper approval must be sought before any of these assets are transferred to anyone. It is important to seek your attorney’s advice prior to transferring anything during your bankruptcy.
Consequences. Transferring property out of your name during your bankruptcy without court approval can result in discipline in your case. In a Chapter 7, your bankruptcy could be dismissed prior to receiving your discharged. In a Chapter 13, your bankruptcy payment could be increased or your case dismissed.
4) Failure To Disclose Change In Circumstances
During a bankruptcy, you are required to disclose changes in your circumstances that could affect your case. Failure to disclose a major change could have major consequences and possibly keep you from receiving the benefits of bankruptcy.
A change in your circumstances could be a good thing or a bad thing. What I am talking about here, and what most often gets individuals in trouble when they are not disclosed, are the unexpected, good things. If you are in a bankruptcy and receive a windfall of any sort, then this must be told to the Bankruptcy Trustee. The Trustee wants to know because the windfall could result in there being property/money available for the Trustee to use to payoff some of your debt that would have otherwise been discharged. Some classic examples of this type of windfall include receiving an inheritance, winning the lottery, an unexpected bonus, or substantial raise.
When you receive a windfall during a bankruptcy, then it is viewed by the Bankruptcy Code as if you had the property on the day you filed your case. Your bankruptcy schedules have to be amended to reflect the change. This could result in the Trustee taking your property (Chapter 7) or an increase in your monthly bankruptcy payment (Chapter 13).
If you fail to notify the Bankruptcy Court and Trustee of this change, then the consequences could be very severe. Your case could be dismissed without receiving a discharge, meaning you will still owe all of your debts. In addition, this could be viewed as bankruptcy fraud resulting in criminal charges brought against you. The bottom line rule: if you have a positive change in circumstances, notify your attorney who can notify the Court.