Top 10 Bankruptcy Mistakes a Client Can Make

Putting off consulting with a qualified bankruptcy lawyer for advice.

As soon as you think bankruptcy may be an option, you should talk to a bankruptcy lawyer.  Most bankruptcy lawyers will provide a free consultation, with no obligation.  Bankruptcy law can be arbitrary and defy common sense (see #5 below for an example).  Sometimes strategic legal planning is required well before a bankruptcy can be filed.

1

Waiting until your income goes up to save the money to file a bankruptcy.

Results in bankruptcy will be drastically different as soon as your projected income increases due to a new job or income source.  The best time to file a bankruptcy is when your income is at its lowest level.

2

Assuming (in Colorado) that you are legally required to use all your income to pay your debts as you are able.

If you receive social security income, due to a federal court ruling effective in Colorado, you may be able to get rid of your debts and start saving your social security instead of using your money for debt service.

3

Hiring a bankruptcy law firm that uses any high pressure sales tactics to sell their services.

A good bankruptcy lawyer will care about every individual case, and will not need to pressure their clients to make more money off of them.

4

Repaying certain debts prior to filing bankruptcy (e.g., to family members).

Yes, repaying your debts can actually create problems in your bankruptcy if you have made payments during the last year to a family member, or the last 90 days if paid to a non-relative.  The creditor you paid can be sued by your bankruptcy trustee to return all the payments received in the year before you file bankruptcy. 

5

Making gifts of any property or money within four years of filing a bankruptcy.

In a bankruptcy, the trustee can recover assets given away by the debtor to share with the debtor's creditor's, even if the person receiving the gift has no idea of the debtor's situation.

6

Holding a business with any assets (such as tools, equipment) in an LLC, corporation or trust.

What may make sense in the estate planning or business side of your affairs can come back to bite you if you file a bankruptcy.  For example, tools of the trade owned by a business entity may be lost to the trustee.

7

Waiting until you are garnished before considering bankruptcy.

If you are getting sued on a consumer debt and can’t afford to make an arrangement to pay, bankruptcy will likely help.  Once your wages are garnished, there is no way to legally force the garnishment to stop so that you can save money to pay an attorney and the costs in bankruptcy.

8

Failing to consider the best strategic time to file a bankruptcy.

For example, if you typically receive large tax refunds, it is best to wait until you have received and spent your refund before filing.

9

Saving money for use after bankruptcy.

There are strict limits on what you can own when filing a bankruptcy.  You cannot carry savings of any kind through a bankruptcy unless it is held in a true retirement plan, or other limited protected places.

10