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Eight Common “Pre-bankruptcy” Mistakes to Avoid When Considering Filing Bankruptcy in Georgia

Despite the propaganda and slanted news reports you may read or hear, the truth is that 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. Here are the eight “pre-bankruptcy” mistakes that I 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 - when I was growing up, my mother often used 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.

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, do not 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 60 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, I may advise you to wait several months prior to filing and I 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 I invite you to contact me 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.

I 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.”

This situation sometimes arises when a prospective debtor, prior to filing, realizes that years ago she was added to her sick mother’s bank account, or was quick deeded a half interest in her father’s house solely for convenience.

Even if you have never touched the asset and never considered it “yours,” the Bankruptcy Court very will might consider that asset to be part of your bankruptcy estate and may try to seize it. Make sure to tell me about any property that has your name on it, and even include property that you expect to inherit from a sick relative.

6. Significant credit card usage prior to filing. Although it seems obvious, avoid the temptation to use credit cards to pay household expenses. As noted earlier, credit card debt incurred right before filing bankruptcy can be challenged and held non-dischargeable.

7. Waiting until one or more judgments are obtained against you prior to filing. In Georgia, a state court judgment can only be obtained after a lawsuit has been filed, your 30 day time to answer has run and usually another 15 day default period has run.

If you receive papers from a sheriff’s deputy or from a process server, you have been sued. If you ignore the lawsuit, the plaintiff will, within 45 days, get a judgment against you.

Judgments are considered secured debts and can get a higher priority treatment in bankruptcy. Judgment creditors also tend to have more leverage against you, especially if they alleged any wrongful conduct by you in the underlying lawsuit.

If a lawsuit is filed against you, it is time to seek legal advice to explore all of your options, including bankruptcy and non-bankruptcy alternatives.

8. Offering post-dated checks to creditors - As you may know, bouncing a check can be a criminal offense in Georgia. Experience has shown that you cannot trust aggressive collection agencies to deposit your post dated checks in a timely manner, nor can you trust them not to deposit all of your post dated checks at once. You certainly cannot trust them to hold your post dated check if you need a few days breathing room.            

This website copyright 2008 by Ginsberg Law Offices, P.C. All rights reserved. No reproduction of the original content on this site without express permission of the site owner. Please direct inquiries to Jonathan Ginsberg, Ginsberg Law Offices, 1854 Independence Square, Atlanta, GA 30338.