Bankruptcy allows individuals to get a fresh start by wiping out some or all of their debts. In addition, because bankruptcy is not meant to leave a debtor destitute, debtors are allowed to keep certain property which is deemed as exempt from seizure and liquidation to pay off creditors. However, to obtain the full benefits afforded by bankruptcy law, a debtor should be careful to avoid certain critical mistakes that can put in jeopardy the discharge of some or all of their debts and the loss of assets that would otherwise be exempt.
Common Mistake #1: Using an Exempt Asset to Pay Debt
Most people do not know, for example, that most 401K retirement plans are fully exempt from the reach of creditors during a bankruptcy. Because many debtors do not know this, and in an effort to pay some of what they owe, many folks deplete or borrow against their retirement savings before even considering bankruptcy as option. If you are facing financial difficulties, consult an attorney to ensure you do deplete what would otherwise be an exempt and protected asset during a bankruptcy.
Common Mistake #2: Leaving a Creditor off the Bankruptcy Schedules Filed with the Court
For a debt to even be eligible for discharge by a bankruptcy it has to be listed on the debtor’s bankruptcy schedules. If a debt is not listed by a debtor, then the creditor does not get a notice of filing and an opportunity to, if appropriate, object to having their debt wiped out. Accordingly, as a general rule, a debt that is not listed is not wiped out by a bankruptcy discharge order.
Common Mistake #3: Attempting to Hide an Asset Prior to the Bankruptcy
One of the worst things a debtor can do is attempt to hide an asset prior to or during a bankruptcy filing. Attempting to hide an asset from the court and the bankruptcy trustee is a federal crime. In fact, it is a federal felony. Attempting to hide an asset will also likely result in the denial of a discharge order.
This type of conduct can include transferring an asset to family member, friend, or related businesses with the intent to keep the asset hidden from the court, bankruptcy trustee and creditors. It is important to note that the law gives the bankruptcy trustee and the bankruptcy court the power to unwind these types of transfers.
Common Mistake #4: Repaying Family or Friends before a Bankruptcy
Many clients naturally feel a moral obligation to pay family or friends for any loans they have granted them. My advice is to clients is to stop making payments on these types of loans prior to the bankruptcy. Under certain circumstances, payments to family and friends could be deemed to be preferential transfers by a bankruptcy trustee. The trustee has the power to claw back these types of preferential payments. For that reason, it is important to first list all creditors in the bankruptcy petition – including family or friends who have lent the debtor money – and to stop making payments prior to the bankruptcy. After the bankruptcy is over, a debtor can always voluntarily pay back her family and friends for any amounts owed.