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Bankruptcy pre-planning tips!

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Bankruptcy pre-planning tips!

All, we have great threads on this board about bankruptcy FAQs in general and what happens file to discharge. I want to take a step back and have the community share what they have learned related to pre-planning prior to filing which I think many overlook and then run into trouble later. I recently helped my brother file and wanted to share some notes I had put together.

 

First and the most important:

 

1. Have reliable transportation
2. Have a place to live
3. Have a bank account (preferably one you do not have debt with)

 

-Never feel horrible or shame about filing! It's supposed to be a fresh start! Most people almost always regret procrastinating. You are fortunate to have an opportunity to learn from your financial mistakes. Use your fresh start to develop good financial habits.

 

- Keep an eye on the last time you used a credit card. The law says that a creditor has the presumption of abuse on any charges of over $500 within 60 days of filing or, cash advances over $750 within 70 days of filing. In general, stop using your credit cards sooner than later if you can help it.

 

- With the said, there's nothing illegal or immoral about spending money, prior to filing, on stuff that will be exempt when you do file. In fact, any decent bankruptcy attorney would advise their clients to do precisely that. See two bullet points below. Smiley Happy

 

- Time and timing in general are your friend. Especially spending and income the previous six months to filing. This is crucial! Be extra careful if you work a job with varying hours, OT, etc. If you are close to the median income already, OT could be the difference between CH7 and CH13.

 

- You need to know your states exemption. It may well be possible to take non exempt assets like cash and turn it into exempt assets like, qualified IRA's. Needed home or auto repairs or things like dental work, glasses/contact lens. Also, legal and filing fees are acceptable as well as the epic grocery shopping trips. Can't have too many poptarts and ramen noodles right? Cram your kitchen and pantry with all manner of non-perishable items. 

 

- Start saving receipts for all purchases, and document where all the cash is going otherwise. Especially if you eat up a chunk of money before filing like a bank account, tax return, or sold asset. 

 

- Do not transfer any assets within a year of filing. Houses, cars, boats or money. The person you gave it to could have to surrender! You want to reduce non-exempt assets but do so by converting to exempt i.e. IRA if you can. Or maybe using any equity in say a older car to get a newer more reliable car with no equity.

 

- File all tax returns. For those struggling to make it, the task of filing taxes often falls to the bottom of the to-do list. Before filing your bankruptcy, make sure you've filed all required tax returns. Your bankruptcy case will be determined by your income and assets, and your tax returns may be used when assessing that information. By filing all tax returns before filing bankruptcy you'll help your bankruptcy process go a lot smoother.

 

- Stop any Autopayments. Once you file bankruptcy, creditors are required to immediately stop taking payments from you. However, when you have an automated payment account setup, those payments may not stop immediately. By stopping your automated payments before you file bankruptcy, you can potentially save yourself hundreds of dollars and avoid the headache associated with getting your money back after creditors have illegally taken automated payments after your bankruptcy filing.

 

- Meet with more than one attorney. This is very important. Not all attorneys are created equal and fees vastly range. This is especially critical if your filing is more complex. It can even make the difference between CH7 or CH13 which are greatly different of course. In general, you always want a CH7. Base your decision on demeanor and your impression of their competence.

 

- Check your life insurance policies. Any cash surrender value could be lost to the trustee.

 

- Don't use HELOCS or Retirement Accounts to Pay off Debt. When using a home equity loan to pay off credit cards for instance, a debtor is essentially making unsecured debt secured. Many people who take out a home equity loan to pay off loans may end up losing their home because they can't afford to make payments on the home equity loan. And any early withdrawal to retirement funds has significant tax penalty.

 

- Specific to filing a CH13, but really applies anytime: Make a realistic budget together and STICK TO IT. Have an emergency fund. Everyone in the family participates in creating a new financial life. A bankruptcy is wasted if you can't support yourself post bankruptcy. 

 

- Tell your attorney everything about your financial situation. If there is anything you are tempted to hold back, it is not worth it. When your petition is ready to sign, review everything very carefully and don't be afraid to make corrections and ask questions about anything you don't understand.

 

Hope this helps!

Message 1 of 9
8 REPLIES 8
Regular Contributor

Re: Bankruptcy pre-planning tips!

Great advice. I would reiterate having a checking account at a bank or credit union you DO NOT owe money! Set up another account and switch your direct deposit over before filing. You do not want to fight cross-collateralization or an account being frozen (even if, ultimately, you will get it back). Also, if you want to get into exemptions, a ROTH IRA is a good exempt savings option, where you can still pull money out, as opposed to a regular savings account, which often is not exempt. Not that the trustee is going to just take all the cash you have, but it's an extra hidey hole, if needed. Disclaimer: No legal or tax advice. Limit on ROTH IRA is $6k a year and it's post tax. I wouldn't transfer anything a week before you file lol...but, if we're "planning." Also, avoid the appearance of "planning" a bankruptcy 😂
Message 2 of 9
Senior Contributor

Re: Bankruptcy pre-planning tips!

In my 2010 BK7 my attorney told me that any cash advances or luxury item purchase made within 90 days of filing can be challenged for discharge by the creditor. I had been using checks from one CC to make the minimum payments on other debts, foolishly trying to forestall the inevitable, so my attorney told me I had to wait 90 days to file. And he and any attorney will tell you that once you have decided to file BK stop making any & all payments to unsecured creditors, you're just throwing money away. Believe me, you do not want 90 days of no payments and corresponding collections calls! Those collection calls were the absolute worst part of filing BK, toward the end I was geting 20/day. Yes, folks say just don't answer the phone if you dont' recognize the caller ID, but collection calls usually spoof their caller ID.

 

In checking with Nolo.com, a great source for BK info, they say this about CC use before filing BK:

-   If you use your credit cards within 90 days before filing bankruptcy for luxury goods and services aggregating more than $725, fraud is presumed

- If you use your credit cards for cash advances totaling more than $1,000 within 70 days before filing bankruptcy, fraud is presumed

 

They laws have apparently changed since 2010, under those rules I would not now have to wait 90 days to file.


Fico 08: 734/716/734 TU/EX/EQ
Message 3 of 9
Senior Contributor

Re: Bankruptcy pre-planning tips!

And about your bank account: My attorney just told me to open an account where I had never done business before, and that was really good advice. I opened an account at a local community bank where I never had any accounts, and closed my accounts with Wells Fargo.

 

Well, those 20 collection calls a day I got? Almost half were from Chase, always the same thing: asking me for permission to debit my "bank account of record" for the past due amount. Instead of telling them the account was closed, because that was none of their business, I would just say "No, if I had the funds to pay the bill I would pay it myself". Well, I had 5-6 mailed notices from Wells Fargo of attempts to debit the account from Chase, if I hadn't closed the account I would have incurred hundreds in overdraft charges.

 

I used to blame the call center - "What do you expect when you outsource collection? They lied and claimed I said Yes". But I've learned since then bill collectors trick you into saying Yes to one question, record that, and then insert that as the answer to a question you would never say Yes to. Such as: "Is this Dave in AZ?" "Yes". And then "Do I have your permission to debit your bank account for the past due amount?" {Inserts my "Yes" from Is this Dave in AZ}

 

And, while illegal, some collectors will just try to hit your bank account on file. So definitely change your banking to a bank/CU where you have not done business before so that no creditor/collector will know about it.


Fico 08: 734/716/734 TU/EX/EQ
Message 4 of 9
Moderator

Re: Bankruptcy pre-planning tips!

Great pre-planning guidance/advice @Tuscani 👍
Message 5 of 9
Frequent Contributor

Re: Bankruptcy pre-planning tips!


@DaveInAZ wrote:

I used to blame the call center - "What do you expect when you outsource collection? They lied and claimed I said Yes". But I've learned since then bill collectors trick you into saying Yes to one question, record that, and then insert that as the answer to a question you would never say Yes to. Such as: "Is this Dave in AZ?" "Yes". And then "Do I have your permission to debit your bank account for the past due amount?" {Inserts my "Yes" from Is this Dave in AZ}

 

And, while illegal, some collectors will just try to hit your bank account on file. So definitely change your banking to a bank/CU where you have not done business before so that no creditor/collector will know about it.


Wow, that is just ridiculously despicable.  




Message 6 of 9
Highlighted
Contributor

Re: Bankruptcy pre-planning tips!

I can't reiterate enough the need to have a reliable car AND emergency funds, especially for those under Ch13.  It doesn't need to be a NEW car, but it does need to be one you can rely on for 3-5 years (the length of Ch13 repayment plus time to discharge).

Message 7 of 9
Community Leader
Super Contributor

Re: Bankruptcy pre-planning tips!

@Tuscani, This is a great thread (just like your other you started many years ago). Im also including mine as well, and I think between the two of them, folks will get a lot of good information, if they take the time to read them! Smiley Wink

https://ficoforums.myfico.com/t5/Bankruptcy/BK7-Guide-Filing-to-Discharge-What-to-expect/m-p/5679669...

My rebuild worked for me, but won't necessarily work for you!
BK7 D/C- 08/2013
Message 8 of 9
Senior Contributor

Re: Bankruptcy pre-planning tips!


@BKSurvivor19 wrote:

I can't reiterate enough the need to have a reliable car AND emergency funds, especially for those under Ch13.  It doesn't need to be a NEW car, but it does need to be one you can rely on for 3-5 years (the length of Ch13 repayment plus time to discharge).


I  don't know much about Ch13, I had a Ch7 in 2010. Each state has different exemptions for certain assets like home & auto. In my 2010 BK7 I owned my 2003 car free & clear and the AZ exemption for one personal auto was $5k and I valued my car at $4500. The Trustee questioned it and I sent her the printout from kbb.com (Kelly Blue Book) showing the trade-in value at $4500 and she accepted it. As for emergency funds most states have pretty low exemptions for cash on hand, but retirement funds, including 401k & IRA, are fully exempt. But stashing a large amount into a 401k/IRA right before filing can be questioned/challenged.


Fico 08: 734/716/734 TU/EX/EQ
Message 9 of 9
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