Listed below are some of the things that I’ve encountered over the years. It’s not an exhaustive list by any means, but I hope you find it useful.
1. Waiting too long to get good advice: Most of my clients come to see me only after they’ve been under financial pressure for a long time. Waiting only makes your health and personal relationships worse. Additionally, many people sell their assets to pay creditors. Then, after they have no more assets, the come to see me to wipe out their remaining debt. Many times those assets would have been protected in their bankruptcy, so the debt could have been wiped out without the loss of those assets.
2. Paying credit cards instead of mortgages, car payments and taxes. Remember, when a bankruptcy is filed, those credit cards will usually be wiped out, so they should be the lowest priority in most instances.
3. Using your 401K or IRA to pay credit cards and other dischargeable debts. Those types of retirement accounts usually are safe in bankruptcy. They should not be used to pay debts which can be wiped out in a bankruptcy.
4. Co-signing for Student Loans and other debts. I know that we find it difficult to say no. Especially when it is a son or daughter and it is for their education. But let me give you an example of a real situation. Dad co-signed for son’s student loans. The loans exceeded $100,000.00. They have a falling out and the son stops communicating with the dad. He finishes school and doesn’t have employment. Son refuses to defer the loans despite dad’s requests. The loans go into default and the collectors come after dad. Because these loans cannot be discharged in his Chapter 7, we filed a Chapter 13 for dad to stop the collection activity and arrange a payment plan.
Unfortunately, he has 2 other children and he won’t be able to help them with their education because of this situation.
Remember, you have other obligations to take care of. In fact, you’ll probably be retired before these loans are paid off. If something goes wrong, you and your family can be hurt. Even your retirement income could be jeopardized.
5. Transferring assets to protect them from creditors. Most such transfers can be set aside by a bankruptcy trustee.
6. Not disclosing transfers of assets. This could make your situation worse.
7. Incurring debt immediately prior to filing your case. Those types of debts are generally not dischargeable and could have other negative consequences
8. You must properly disclose all assets, liabilities, income and expenses.
9. Failing to tell your parents to do proper estate planning can be a disaster. If you file a Chapter 7 and become entitled to inherit property within the next 6 months, most of that inheritance will have to be paid to your creditors. If you file a Chapter 13 case, that time may be extended to up to 5 years. The solution is really quite simple. Your parent can change his or her will. There are several different ways to do this, but if you don’t want to lose your inheritance to your creditors, you’ll be well advised to address this issue. Here’s a real situation, I consulted with a man whose mother had passed away and left him a beautiful home on Lake Champlain in New York. Unfortunately, he had filed a Chapter 7 (not with me) only a couple of weeks before his mom passed away. The Chapter 7 Trustee was now in the process of selling that lovely home. All of his creditors are going to be paid in full. Plus he had to pay the Trustee’s fees and costs as well. And he had no control over the sale. All of this could have been avoided with proper planning. What a shame!
10. Obtaining a mortgage modification before filing a bankruptcy. A client I recently consulted was very pleased that she was able to modify her mortgage. Her monthly payment was lowered by $700.00 and her arrears were included in her modified loan, so her loan payments were now current. A good result? Yes and No.
She also had $35,000.00 in credit card debt which she wanted to get rid of with a Chapter 7 Bankruptcy. I had to give the bad news that her income was too high to file a Chapter 7. She would need to file a Chapter 13 and her payment would be over $600.00 per month. If she had come to me before the loan was modified she could have filed her Chapter 7 and wiped out her credit card debt. Then she could have applied for and obtained her loan modification. This mistake cost her dearly.
Because of the Means Test. Her income exceeded the median income, so we had to do a Means Test to see if she could qualify for a Chapter 7. Unfortunately she didn’t qualify because her allowed monthly expenses were too low.
And, you guessed it. When I did the Means Test calculation using her old mortgage payment, she qualified.
Don’t make this mistake. Please!
11. Marriage. No, I’m not saying marriage is a mistake. I’m saying planning before and maybe during marriage is wise. For example, if a person with a lot of debt and lower income is planning to marry a person with not much debt and higher income, it might be wise to file a Chapter 7 before they marry because after they get married, their combined income may be too high to allow for the filing of a Chapter 7.
During marriage the spouse with good credit will allow the spouse with bad credit to become an “authorized user” on his or her credit cards. The spouse with bad credit can rack up the debt and take off, leaving the unsuspecting spouse with all the debt. It happens!
12. Divorce. I’m not saying that getting a divorce is a mistake. But planning can be important. For example when one spouse agrees to transfer a jointly owned home to the other spouse a deed should be signed and filed as soon as possible. I recently had a case where that wasn’t done. When the spouse who thought he owned the home tried to modify the mortgage, the lender refused because the deed was still in both names. The former spouse refused to sign the deed out of spite and the bank foreclosed before the owner could get a matrimonial judge to enforce the parties’ agreement.
Bankruptcy relief is available to those honest people who need a fresh start. The Courts want to help, but full disclosure is expected and required. It is best to speak to your attorney if you have any questions or concerns.
13. Holding Money For Someone Else. While it is probably never a great idea to hold money for someone else, it can create unnecessary complications in a Bankruptcy Case.
If you have a bank account in your name, you must disclose that account and how much money is in it on your Bankruptcy Schedules. If it is really not your money, you’ll need to prove it to the Trustee. If you have good records which can document the source of the funds and have a good explanation for the reason why you are holding the money, you’ll be okay.
But, if you’ve been getting cash from the other person and putting it in your bank account, the Trustee won’t believe the money isn’t yours.
Either way, it will mean added work for your attorney, which will probably cost you more money in legal fees.