Filing for Bankruptcy?
Bankruptcy can be a trap for the unwary, particularly if you file bankruptcy pro se, i.e., without legal representation by a knowledgeable bankruptcy attorney. Some common mistakes to avoid when filing for bankruptcy are listed below. You can escape all of these errors by retaining competent bankruptcy counsel and following his or her directions.
- Filing Bankruptcy When there Are Better Alternatives. Some people who file bankruptcy are unaware there may be less drastic and costly alternatives. Alternatives can include renegotiation of debts (which also is known as a workout) with creditors and the short sale of underwater real estate properties.
- Filing Bankruptcy at the Wrong Time. Timing in a bankruptcy is everything and can have wide-ranging implications. For example, if a debtor files bankruptcy while having excess cash on hand, i.e., cash that exceeds the allowed exemption for wages in Minnesota (20 days exemption for wages after they are deposited to debtor’s bank account or exemption for 40 times the federal minimum hourly wage or minimum of 75% of weekly disposable wages), he or she will be required to pay such funds over to the trustee. This could arise if the debtor filed bankruptcy after receiving a paycheck but held on to the cash and did not quickly pay the bills which the paycheck will be used to meet.
- Filing the Wrong Type of Bankruptcy. There are two types of bankruptcy available to a consumer debtor: a Chapter 7 liquidation and a Chapter 13 wage earner reorganization. The type of bankruptcy used depends on the consumer’s personal circumstances and the purpose of the bankruptcy. If a debtor has low or no income and is without assets, a Chapter 7 bankruptcy is the logical choice. If the debtor is underwater on a mortgage, however, a Chapter 7 bankruptcy will cause the debtor to lose the property. Instead, a Chapter 13 wage earner reorganization must be filed. If bankruptcy is filed under for the wrong chapter, the debtor could lose valuable property, or end up not discharging certain debts.
- Lying. Bankruptcy debtors sometimes lie with drastic consequences even though bankruptcy cases must be filed under oath. A bankruptcy case will be dismissed if the bankruptcy judge determines that the debtor lied in his or her bankruptcy filing. This could result in dismissal of the bankruptcy case and the debtor being denied the right to file for bankruptcy ever again as to the debts at issue.
- Omitting Assets in the Bankruptcy Petition, Schedules, and Other Documents. Bankruptcy debtors must list each asset they own, the debts they owe and the names and addresses of their creditors. If a debtor fails to list an asset, this can be considered a fraud on the court and may result in the denial of a discharge for the omitted debts or, in egregious cases, of all debts.
- Errors in Classifying Assets in the Bankruptcy Filing. In filling out the bankruptcy schedules, debtors must classify their assets, liabilities and creditors. Assets must be described as either real property or personal property (property other than real property). Debts and creditors must be described as secured, i.e., a mortgage or other lien, unsecured (creditors who have no mortgage or other lien) or priority (unsecured debts for taxes and other government debts). A debtor’s failure to properly classify an asset or liability or to list a creditor may result in the denial of a discharge for a particular debt.
- Transferring Property to Relatives or Friends before Filing. Persons sometimes repay friends and relatives for monies lent to them even though they have not repaid their other creditors. If a bankruptcy is filed less than one year after such a payment, the transfer is a preference and the bankruptcy trustee can sue the friend or relative to obtain the return of the money. Some debtors also may try to hide assets by transferring them to others before filing bankruptcy. These transfers are fraudulent and will be set aside at the request of the bankruptcy trustee and can result in the denial of discharge.
- Making Luxury Credit Card Purchases before Filing Bankruptcy. Some debtors decide to make luxury purchases – as opposed to charging ordinary living expenses – by credit card shortly before filing bankruptcy. This is a mistake. The creditor will review the charges and object to the discharge of any luxury purchases. After bankruptcy, the debtor could end up owing the money to the creditor.
- Omitting Property Exemptions or Choosing Incorrect Property Exemptions. Property exemptions allow a debtor in bankruptcy to keep certain property that otherwise would be taken and sold to pay the creditors. As a result, exemptions play a key role in bankruptcy. Debtors sometime err by failing to assert an exemption in a timely manner. A late filed exemption can be deemed waived. Also, after the filing of the bankruptcy case, the bankruptcy trustee can object to exemptions on grounds that they are not applicable. The debtor will need to respond to the trustee’s objection by either refuting it or seeking to amend and correct the exemption election.
- Failing to Comply with Credit Counseling and Financial Management Requirements. In both Chapter 7 and Chapter 13 bankruptcies, the debtor must take a credit counseling class from an approved provider (in most cases before filing the case). After filing, the debtor must take a financial management course as a condition to obtaining a discharge. Often, pro se debtors become confused about the counseling requirements, and fail to file the proper certificates. A failure to comply with the counseling requirements cause the bankruptcy case to be dismissed or for a discharge not to be granted.
- Failing to List all Potential or Actual Legal Claims. Debtors often fail to list in their bankruptcy papers lawsuits that they have brought against others. The lawsuit is considered an asset and is property of the bankruptcy estate. After the filing, the debtor may be able to continue with the lawsuit, provided that the bankruptcy trustee gives his or her approval. Sometimes, if the claim is view as viable and easily reduced to a collectible judgment, the trustee may seek to have counsel appointed to continue the lawsuit for the benefit of the bankruptcy creditors.
- Failing to Have Federal Income Taxes Discharged. Unpaid federal income tax debts sometimes can be discharged in bankruptcy but there are stringent requirements which must be met. If the case is filed case prematurely, i.e., too soon after the tax return is filed as one example, the debt will not be discharged.
- Failing to Disclose all Sources of Income. A bankruptcy debtor must list all sources of income in addition to all expenses. This includes even the most inconsequential of part-time jobs. A debtor’s failure to disclose his or her income can result in the dismissal of the bankruptcy case.
- Omitting Motor Vehicles or Vehicle Loans. Debtors sometimes fail to list their motor vehicles or auto loans in their bankruptcy filings. A motor vehicle is personal property and must be listed. An auto loan is a secured loan on personal property which also must be listed. If a car is owned free and clear, it still must be listed as an asset. A leased car is not owned by the debtor and is not listed. The lease, the lease payments and terms and the lessor, however, must be disclosed. The failure to list a motor vehicle as an asset can be construed as fraudulent and result in the dismissal of the case or even the loss of the vehicle. The transfer of a motor vehicle to another person before the bankruptcy could be construed as a fraudulent transfer unless the vehicle was sold in a commercially reasonable sale, i.e., fair market value was paid for it.
If you are thinking about bankruptcy, make sure you don’t fall into any of these traps. Get help from an experienced bankruptcy lawyer. Call Gregory J. Wald at (952) 921-5802.