Despite the misinformation spread by banks and credit card companies, most people facing difficult financial troubles do not think of bankruptcy as a first option. Instead, most of us look to just about any other course of action other than bankruptcy.

Sometimes, however, your honest and good-faith efforts to deal with your debt situation outside of bankruptcy can create hardship or problems if you do decide to file.   However, in an effort to avoid filing, you may do something that could create problems if you do decide to file.  Here are the eight “pre-bankruptcy” mistakes that we tend to see frequently. If you have made one or more of these mistakes, all is not lost – we just may have to alter our strategy and/or timing.

1. Taking out a 401(k) or pension loan to pay credit card debts

You may have heard the expression “the squeaky wheel gets the grease.” In a pre-bankruptcy setting this can translate into the unrelenting and unpleasant phone calls from credit card bill collectors. The real story is that credit card debt is unsecured, which means that the credit card lender is at the bottom of the list when it comes to getting paid. They have no property to seize, and they cannot garnish your wages unless and until they have won a state court judgment against you.

Therefore, it is almost never a good idea to raid your 401(k) or other retirement plan to get money to pay unsecured debts. Why? If you do end up filing for bankruptcy, your pension money is almost always going to be “exempt” or sheltered property. This means that no one – not your creditors, not the trustee, not the Court – will have any right to touch your retirement money.

Secondly, if you do end up filing for bankruptcy, your budget will include a monthly repayment to your pension plan. Bankruptcy trustees will usually object to this repayment as they consider it unreasonable that you would pay yourself back, while not paying other creditors. Then, if you cancel the loan, you will have early withdrawal and tax consequences.

In sum, it is almost never a good idea to take early withdrawals or loans against your 401(k) or pension.

2. Transferring credit card debt from high interest cards to low interest cards. The bankruptcy law gives credit card lenders enhanced protection in the case of cash advances and purchases made within 90 days of filing. A balance transfer is viewed as a cash advance, and can be challenged by the creditor after you file.

If you have made a balance transfer, we may advise you to wait several months prior to filing and we may advise you to make monthly payments while you are waiting to demonstrate good faith.

3. Filing when you are expecting a large tax return.  Although the Georgia bankruptcy exemption law does provide some room to shelter cash assets like a tax return, you are usually better off filing after receiving and using your tax refund money. Every case is different and you should contact our office for more information about this point.

4. Repaying family loans prior to filing.  It is not uncommon to turn to family members or friends for financial help in times of trouble. Unfortunately, if you end up in bankruptcy, you cannot treat family members differently from other creditors. The Bankruptcy Code has a prohibition against certain transfers called “preferences.”  Often, a debt payment to a family member made within the year prior to filing is considered a preference and can be reversed by the bankruptcy trustee.

We regularly see cases where the trustee has filed a lawsuit against the debtor’s brother or parents to recover hundreds or thousands of dollars in recent repayments.

5. Transferring assets prior to filing. 

If you have ownership of real estate, motor vehicles or certificates of deposit, and you transfer your ownership for the purpose of frustrating the claims of creditors, the bankruptcy trustee can file suit in Bankruptcy Court to “avoid the transfer.”  Not only could you lose your bankruptcy discharge but the transferee (the person who now owns the asset) will have to give it back to the trustee.


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Jonathan Ginsberg represents honest, hardworking men and women in the Atlanta area who need bankruptcy protection.

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