Filing for bankruptcy protection is an anguishing decision few take lightly. The decision of when to file bankruptcy is often driven by urgent factors beyond one’s control, such as a looming home foreclosure, sudden job loss, wage garnishments, or a lawsuit.
But if you have the luxury of time on your side and can do some planning, you can avoid some major pitfalls that can negatively affect not just you but friends and family as a result of your bankruptcy.
1. If you think you may need to file bankruptcy in the near future, STOP using your credit cards! Whether you ultimately file Chapter 7 or Chapter 13 bankruptcy, a legal presumption is raised that you were already insolvent during the 90 days prior to filing bankruptcy. During this 90 days, any new debts you incur, such as new credit card purchases or cash advances, may give the credit card company or other creditor reason to sue you in your bankruptcy case. The Bankruptcy Code gives such creditors the benefit of a legal presumption that new debts incurred to them during the 90 days prior to the bankruptcy filing were incurred through fraud. The legal presumption means that the burden of proof switches to the debtor, who must prove that there was no fraud. If the creditor sues over such new debts, what do they stand to gain? After all, the debtor is already in bankruptcy, right? The creditor stands to have that new debt declared non-dischargeable by the bankruptcy court. Debt that might otherwise be discharged, can be declared by the court to be non-dischargeable, and thus survive the bankruptcy.
2. If there is any likelihood that you may need to file bankruptcy, do not repay debts to family members or friends. Debts to these “insiders” are suspect under the Bankruptcy Code. If you think about it, most everyone would, if given the choice, pay back debts owed to family members or friends before paying back a debt to any other creditor. Such favoritism is considered by the Bankruptcy Code to constitute a “preferential payment,” and any preferential payment to an insider within one year prior to the filing of the bankruptcy case can be “set aside” by the bankruptcy trustee, which means that the trustee can force one’s family member or friend to give back the payment even if the repaid debt was legitimate.
3. If there is a chance you may need to file Chapter 7 bankruptcy, never attempt to protect assets such as a home or a car by transferring title to a family member or a friend. While this may seem obvious to most, many mistakenly believe that transferring an asset out of one’s name, or “taking one’s name off of” an asset will protect that asset from one’s creditors in bankruptcy. In fact, transferring title to a valuable asset without receiving fair market value for the property can be investigated as a fraudulent transfer by the bankruptcy trustee. The bankruptcy trustee can sue the family member or friend to whom the asset was transferred in order to recover the asset for the bankruptcy estate. The upshot? Never transfer a valuable asset to a family member or friend if you think you may file for bankruptcy. Doing so will put your family member or friend at risk of a lawsuit by the bankruptcy trustee.