Don’t Withdraw Money From A Retirement Account

It generally takes years of hard work and regular contributions to accumulate retirement savings in a 401(k) or IRA retirement account. While it may seem like withdrawing money from a retirement account to pay creditors might help your bankruptcy case, there are many reasons why it will not.

First, retirement accounts receive among the greatest protections against creditors of all assets either inside or outside of bankruptcy. Most tax-exempt retirement accounts are fully exempt and the exemption limits on certain IRAs generally exceed $1 million. Since you get to keep those retirement accounts in bankruptcy, it makes no sense to use them to pay creditors, particularly on debts that would be fully dischargeable in bankruptcy.

Second, while funds in retirement accounts are fully protected against creditors, once those funds are withdrawn and deposited into a bank account, they will require a different exemption for protection or they may become part of your bankruptcy estate available to creditors.

Third, if you used funds withdrawn from a retirement account to repay creditors in the three months before you file bankruptcy or if you used funds withdrawn from a retirement account to repay friends or family members in the twelve months before you file bankruptcy, those payments may be “preferences” that could be recaptured by a Chapter 7 Trustee and shared with all of your unsecured creditors.

Fourth, if you used funds withdrawn from a retirement account to prepay a future expense before you file bankruptcy, a Chapter 7 Trustee might consider such payment to be a “fraudulent transfer” that should be recaptured and shared with all of your unsecured creditors.

Don’t Transfer Property Out of Your Name or Sell Property For Less Than It Is Worth

Many people move property out of their name, by gift or sale at less than fair market value, for fear of losing the property in bankruptcy. A few examples include: changing title to a car from your name to the name of your child or spouse; removing your name from a joint bank account; moving funds from your bank account into a bank account belonging someone else; and deeding real property titled in your name to your spouse or another person for free or a nominal value. These transfers are a huge mistake because the assets might have had exemptions to protect them from creditors and, more importantly, the transfers may be considered actual or constructive fraudulent transfers that can be reversed in bankruptcy. The proceeds of the property would be shared among the unsecured creditors and you may have jeopardized your ability to obtain a discharge.

How will a trustee found out? Your bankruptcy petition requires extensive disclosure of property transfers prior to filing and you can be sure you will be asked about transfers under oath at the Meeting of Creditors. The look-back period for reversing such transfers can be four years or longer, depending upon the property and the nature of the transfer. Concealing such transfers could land you in jail.

Don’t Pay Unsecured Creditors

Although it may make your head explode, you should not repay any unsecured debts once you decide to file bankruptcy. Unsecured debts are debts without collateral. You should continue to pay secured debts, such as home mortgages or car loans, assuming you intend to keep that property. We’re also talking about debts, not regularly recurring monthly payments, such as the cable bill. You should continue to pay the monthly bills. There are a few reasons not to pay your unsecured debt.

First, it won’t help your bankruptcy case. It may seem odd, but no one cares that you tried to make payments up to the date of filing. You don’t get any points for making the payments and the debt will be discharged in Chapter 7 and reduced or eliminated in Chapter 13 anyway. Making the payments basically is a waste of money. It would be much better to use the money to pay your bankruptcy attorney.

Second, even if you paid the debt down to zero, there is no assurance that you will be able to retain the credit card once your bankruptcy case is filed. Creditors monitor bankruptcy filings and, in most cases, will close all of your accounts once you file, regardless of your recent payments.

Third, paying more than $600 to any one unsecured creditor in the three months before you file bankruptcy may be considered a “preference” payment by a Chapter 7 Trustee who could seek to recapture the payments and share them with all unsecured creditors.

What about repaying a debt owed to a family member or friend? Surely, that must be allowed? Unfortunately, the law is even stricter with repayments of debts owed to relatives, friends and business associates. The look-back period for recouping those debt repayments extends to one year prior to filing. It may seem crazy to you not to repay grandma before you file, but bankruptcy law wants to make sure that American Express and Discover are treated the same as grandma.

NOTE: Nothing prevents you from repaying friends, relatives and business associates after your bankruptcy case is closed.

Don’t Use Credit Cards After Deciding To File

Once you decide to file bankruptcy, stop using credit cards. Instead, use a debit card which withdraws money directly from your bank account. One of the reasons why a particular debt may be determined to be “non-dischargeable” is if it was fraudulently incurred. Fraud in this context means that the debtor incurred the debt with no intention of paying it. Once you decide to file for bankruptcy, particularly in Chapter 7 cases, you would have no intention of paying any unsecured debts.

Credit card companies typically review the pattern of card usage in the months immediately prior to filing. If credit card usage spiked prior to filing, the issuer may challenge that particular debt as having been fraudulently incurred.

Bankruptcy law considers some debts presumptively fraudulent. If you charge more than $650 for the purchase of luxury goods or services on any single credit card within the 90 days before you file bankruptcy, or if you take cash advances that total more than $950 on any single credit card within the 70 days before you file bankruptcy, those particular debts are presumed to be nondischargeable and will still be owed despite your bankruptcy. Bankruptcy law doesn’t want you going on a wild spending spree before filing bankruptcy.

To Avoid Actions That Might Hurt Your Case, Contact Us For A Free Initial Consultation

Taking action early with the help of Balbus Law Firm will not only relieve the debilitating stress that comes with unmanageable debt, it will put you in the best position to file bankruptcy. Many of the problems discussed above can be fixed simply by waiting to file until the look-back periods have expired. Other methods to avoid the problems are also possible. We will assist you in planning the best time to file and the best way to deal with potential problems based on your particular situation.

For more information about what you should not do prior to filing in a free initial consultation, call 203-286-4121 or e-mail us.

Balbus Law Firm is a debt relief agency. We help people and businesses in New York and Connecticut file for bankruptcy relief under the Bankruptcy Code.