When you are overwhelmed, and in debt, you may have tried other ways to get financial relief before you realized that bankruptcy is your best option. Most people don't realize that there are some things that you should avoid before you file your bankruptcy paperwork with the court. There are specific actions that the court may consider fraudulent, or it could deny the action or drop your case entirely.
Selling or Giving Away Property
Giving away expensive items before you file for bankruptcy sounds like a way to avoid them being seized, but it can cause you problems. Another avenue people take is to sell the item for far less than the value and then repurchase it after your bankruptcy so it won't show up in their bankruptcy estate. If the bankruptcy court discovers any of these tactics, your bankruptcy discharge will be denied, or you could face criminal charges for fraud.
Buying Big Ticket Items Before You File
Using your credit card to buy expensive items just before you file is also a red flag for the courts.
You may believe that since your debt will be eliminated, you can purchase that high dollar item that you usually wouldn't be able to afford and expect it to be eliminated in bankruptcy. The bankruptcy law was enacted to prevent this type of behavior. Bankruptcy law is supposed to be fair to the consumer and the creditors. The court will look at your debt in the last six months before filing bankruptcy to see if any recent excessive amounts of purchases were made. The judge might refuse to discharge those debts if the items were not a necessity.
Taking out a Second Mortgage
A second mortgage will not help you remove your debts; in most cases, it will only add another bill to your already burdened finances. It doesn't make sense to take out a second mortgage to pay your unsecured debt like medical or credit cards when you could have eliminated that debt in bankruptcy. The equity in your home is usually protected through the exemptions allowed during bankruptcy, while mortgage debt is not allowed to be discharged under the bankruptcy laws. If you have mortgage debt, you can file Chapter 13 and make a court-approved repayment plan for 3 to 5 years.
Withdrawing Retirement Funds
Withdrawing funds from your retirement accounts to attempt to get current on your debts is not a sound financial plan. Your retirement funds are usually protected in bankruptcy and cannot be seized to repay your creditors. If you are at an age where you can safely work enough years to add back to the retirement account, you may be fine. Taking money from your retirement accounts could jeopardize your future if you can no longer work.
Credit card debt is a significant problem in the United States. Americans owed over a trillion dollars in credit card debt in 2019.
The Credit Card Accountability Responsibility and Disclosure Act of 2009 put federal rules and regulations on the use of debit cards. Financial institutions have lost income due to excessive bank fees no longer being allowed. Consumers must agree to overdraft before they can be charged an overdraft fee.
Encouraging Credit Cards
Banks are encouraging shoppers with great promotion rates, and 0% offers to obtain new credit cards. Banks receive more profit from credit card usage, than from debit cards. If consumers are hooked on credit cards, banks can replace the debit card usage fees in overdraft charges for interest rates and fees on the credit cards.
Cycle of Debt
One of the most common causes of financial issues is credit card debt. It can start a cycle of purchasing everyday items on your credit card when you have run out of paycheck. You tell yourself you will pay the balance at the end of the month, but often only the minimum amount due gets paid.
Bankruptcy can help you eliminate your credit card debt and stop the harassing phone calls and texts and emails regarding your credit card debt. A court order called the automatic stay protects you from any further collection activities while your bankruptcy case is active. If the creditor does not stop collection attempts made against you, you can take them to court, and they may be found in contempt and face penalties.
When someone is considering bankruptcy, they may worry they will lose their assets such as vehicles, homes, jewelry, etc. Many times, debtors sell some of their property to pay for their bankruptcy attorney or bankruptcy fees. There are a few guidelines and rules you should follow if you sell the property to a family member just before your bankruptcy case to avoid negative actions such as the dismissal of your bankruptcy case or being charged with bankruptcy fraud.
Selling Nonexempt Property
You can sell your nonexempt property during bankruptcy if you meet certain specific requirements:
You needed the money for necessities such as housing, food, utilities
You sold the property at fair market value
You kept excellent records of the transaction
You obtained trustee and court permission beforehand
If you have documented the reasons and can show that you needed the money for necessities, you can avoid any issues with the bankruptcy court. If you use the money for any other purpose, you should speak to a bankruptcy attorney before selling the property to ensure that you are legally able to do so.
Chapter 7 Bankruptcy
When you file Chapter 7 bankruptcy, you will submit paperwork declaring your exempt and nonexempt property. The bankruptcy trustee will evaluate your nonexempt property and determine if it could be sold to satisfy your debts to your creditors. Since the bankruptcy trustee will sell the property, there is no reason for you to sell it if you do not need it for necessities.
Avoiding Bankruptcy Fraud
If you try to hide any previous transactions in the past three to five years before your bankruptcy, you may risk penalties such as dismissing your case, paying restitution, or serving jail time for fraud.
In 2005 the bankruptcy abuse prevention and consumer protection act was signed into law, stipulating that many types of retirement plans, including IRAs, are exempt assets in bankruptcy. These accounts cannot be used to satisfy creditors' demands for payment on your debt.
Protected Retirement Plans
Company retirement plans such as simplified employee plan or SEP and Simple IRAs can be protected in bankruptcy. Company retirement funds that are rolled over to an IRA can also be protected in bankruptcy. SEP, IRAs, simple IRAs, and most rollover IRAs, are protected from creditors in bankruptcy up to a dollar value limit that is applied based on your circumstances.
Keeping Accounts Separate
Opening a second account for a rollover IRA from a retirement plan is a good idea for record-keeping. While it is not a legal requirement, it will help avoid any issues that may come up during the bankruptcy proceedings. It is easier to document the origin of the assets with separate accounts.
If you have significant assets in your retirement plan and want to be sure that it is safe from creditors, contact an Elk Grove bankruptcy attorney today.
You may wonder what will happen to your debt during your bankruptcy case. Unsecured debt like credit cards, medical debt, and payday loans will be eliminated, but the secured debt will be handled differently. Secured debt usually includes a home mortgage or vehicle loan. The lender holds the property as collateral until you have paid off the loan.
Secured Credit Cards
Some retailers like Sears or JCPenney issue secured credit cards. They claim to take your property if you fall behind in payments. While they may have a right to repossess the property, they do not have the right to enter your home to do so. These companies know this and rarely attempt to repossess property purchased with their store cards.
Some banks will also let you open a credit card that is secured by cash. They will hold the money in an account, and if you fail to make your credit card payments, they will take the money from the account for the secured credit card debt.
Home equity credit cards are secured against your home. It is almost always a bad idea to use these types of cards. If you fail to make the payments, you could lose your home.
An automatic stay goes into effect as soon as you file your bankruptcy papers with the court. This effectively interrupts all secured and unsecured creditors from taking any action against you to collect on your debt for a certain period of time. The automatic stay stops phone calls, letters, foreclosures, vehicle repossessions, and utility shut-offs to name a few.
The bankruptcy court can sometimes stop secured creditors from taking collateral by removing the creditor's lien. This action renders the debt unsecured. Unsecured debt can often be eliminated in your bankruptcy case. Another option for dealing with secured debt as you can pay the value of the property at the time of the filing and not the amount you still owe on the loan. This enables you to keep the asset and pay considerably less for the item.
Chapter 13 Bankruptcy
Filing Chapter 13 bankruptcy enables you to restructure your debt so you can gradually pay the arrears on any secured property you have fallen behind in payments. Sometimes your interest rate can be lowered, making your payments even lower.
If you are overwhelmed in debt and worried about losing your home or other secured property, contact a Sacramento bankruptcy attorney to find out how you can get financial relief.