8 Common Mistakes When Filing for Bankruptcy

You can file for bankruptcy under Chapter 7 or under Chapter 13. Each type of Chapter provides different types of debt relief, some of which might not solve your debt problem. The most common mistake is to choose Chapter 13 when you should have selected Chapter 7. 

Chapter 13 will cost more and last longer because you must pay all your debts eventually. However, if you want to protect your assets, you shouldn't choose Chapter 7 either.

Your income must be below a specific threshold to qualify for Chapter 7 bankruptcy. If you file for bankruptcy with a high income, your application won't go through. Instead, work with a qualified bankruptcy attorney to determine if your income is above the threshold.

Before you file for bankruptcy, you may pay some creditors and ignore others. For instance, some debtors pay their family members while avoiding other ordinary creditors. Bankruptcy regulations don't allow debtors to treat family member creditors better than other ordinary creditors. A bankruptcy trustee will simply go to court and reclaim any amount that you repaid to a family member. 

The laws in most states shield retirement accounts from creditors. If you are filing for bankruptcy, your creditors can't touch your retirement account. That means that you can clear your debt and still maintain the funds in your retirement accounts. Unfortunately, some debtors use the funds in their current accounts to try and clear their credit card debt. This makes those funds no longer exempt, so check your state’s laws.

You might want to make significant purchases just before you file for bankruptcy. Once you file for bankruptcy, the creditor can object and point out the recent purchases. The solution is to avoid bundling up new purchases if you plan to file for bankruptcy in the near future. 

Some debtors think that they can transfer assets, such as a house, into somebody else's name before filing for bankruptcy. If you have to transfer a valuable asset, you must get paid the right price for that asset's market value. Otherwise, a bankruptcy court will consider the transfer to be fraudulent and overturn it. You can ask the bankruptcy court to exempt the asset from your creditors.

You might try to offset your debt by taking another loan. This is especially common if you suspect that your creditors might auction your home. An attorney can advise whether you will keep your home after filing for bankruptcy. That way, you don't have to take a mortgage.

If you get married, you can merge your finances with your spouse's. But such a move can have catastrophic consequences when you file for bankruptcy. If you file for bankruptcy as a single person, the court will only scrutinize your finances. However, if you are married, the court will also analyze your spouse's assets and income. 

Since you recently got married, your finances will have drastically changed. The court might deny your application for Chapter 7 bankruptcy and direct you to apply for Chapter 13 bankruptcy. Another common mistake is filing for bankruptcy when you expect to get a large sum of money, such as a divorce settlement, insurance payout, or inheritance. A sudden increase in your income close to a bankruptcy filing can affect the success of your bankruptcy application. 

Before you begin the bankruptcy filing process, reach out to Custer Custer & Clark LLC. We are a bankruptcy firm that supports clients through trying times. Our experts can help you organize and discharge debts primarily by filing for bankruptcy under Chapter 7 or 13. Contact us to get started.