Bankruptcy is available to help those who have fallen on hard times erase debt and start fresh. Filing for bankruptcy can be a huge relief for those who cannot escape tens of thousands of dollars in debt.
However, it is not an easy process. There are a lot of steps that must be followed. Your finances will be reviewed thoroughly. You could even end up losing assets.
You may have done some research on what you need to do before filing for bankruptcy, but do you know what you shouldn’t do? Here are some common mistakes to avoid.
Mistake #1: Filing at the Wrong Time
While you can file for bankruptcy multiple times, there are some limitations. After you have received a Chapter 7 discharge, you must wait eight years from the date of the filing before you can file for another one. If you have received a Chapter 13 discharge, you must wait six years from the date of the filing before you can file for Chapter 7 discharge.
Because of these limitations, you might want to wait to file if you know you might face an even more severe financial problem in the future. For example, if you have a medical condition, you might be incurring medical debt and want to hold off until your condition stabilizes. You may also want to wait if you know that issues such as unemployment, eviction, foreclosure, or car repossession are imminent.
Mistake #2: Draining Your Retirement Account
Because you can typically protect retirement funds in bankruptcy, there is no need to drain your IRA or 401(k) to pay off debts. Let bankruptcy take care of it. Contact a good bankruptcy lawyer for help protecting these assets.
Mistake #3: Moving Assets
To protect your assets from bankruptcy, you may be tempted to transfer or hide assets before filing bankruptcy. You do not want to do this. It could cause your discharge to be denied. You could even face criminal penalties.
Now, if you sold property before you filed for bankruptcy so that you could pay for necessary expenses, such as rent, food, or utilities, you should be OK. Just be prepared to explain all your transactions to the bankruptcy trustee.
Mistake #4: Racking up Debt
This is a huge no-no. Maxing out your credit cards right before a bankruptcy filing looks suspicious and can get you accused of fraud. The court may decide that this debt is not able to be discharged in bankruptcy. So, if you are thinking of buying luxury clothes or taking a week-long vacation, you likely won’t get away with it. Your purchases right before bankruptcy will be heavily scrutinized.
Why Hiring a Bankruptcy Attorney Is Important
One of the smartest things you can do before filing for bankruptcy is to consult with an experienced bankruptcy attorney. Filing without legal guidance can lead to costly mistakes – like unintentionally committing fraud, omitting key information, or making financial decisions that hurt your case.
A qualified attorney will help you understand your options, avoid common pitfalls, and ensure your paperwork is accurate and complete. They’ll also guide you on what actions to avoid before filing, such as transferring assets, paying off certain debts, or running up credit cards—moves that could raise red flags with the court. Having a professional in your corner increases your chances of a smooth, successful bankruptcy process.