What Should You Not Do Before Filing Bankruptcy?

When considering bankruptcy, understanding which actions to avoid before filing is important. Certain financial activities undertaken in the period leading up to a bankruptcy petition can significantly impact the outcome of the case. Such actions might lead to the dismissal of the bankruptcy, the denial of a debt discharge, or even severe penalties.

Avoid Manipulating Assets

Transferring property to others before filing for bankruptcy can create significant problems. This includes moving assets like real estate, vehicles, or substantial cash to family members, friends, or business associates. Such transfers are often scrutinized as “fraudulent transfers,” which bankruptcy law can reverse.

The U.S. Bankruptcy Code allows trustees to review transactions before filing. This “look-back” period is typically two years for fraudulent transfers, though some state laws extend it. If a transfer is deemed fraudulent, the trustee can recover the asset or its value from the recipient. The property you attempted to shield could still be sold to pay creditors, potentially leading to denial of debt discharge or criminal charges.

Concealing any assets from the bankruptcy court is a serious offense with severe consequences. Attempting to hide assets from disclosure, whether cash, property, or other valuables, is illegal. The bankruptcy trustee investigates a debtor’s financial situation and often discovers hidden assets through various means, including reviewing financial records, tax returns, and public searches.

Hiding assets can lead to the denial of a debt discharge, meaning the debts you hoped to eliminate will remain your responsibility. Intentionally concealing assets can also result in criminal charges. Obligations from a case where discharge was denied for hiding assets may not be dischargeable in any future bankruptcy filing.

Selling assets for significantly less than their market value, especially to those close to you, is another problematic action. This practice can be viewed as an attempt to hide equity or defraud creditors. The trustee has the authority to undo such sales if they appear to be a “constructive fraudulent transfer,” even without intent to deceive. The goal is to ensure fair treatment for all creditors, and such transactions can undermine that principle.

While not always prohibited, using non-exempt assets to purchase exempt assets without proper guidance can be seen as an attempt to defraud creditors. Exempt assets are those protected from liquidation in bankruptcy, such as certain equity in a home or vehicle. Without consulting a legal professional, this strategy might be scrutinized by the trustee if it appears excessive or primarily designed to shield assets from creditors.

Avoid Questionable Debt Activities

Making preferential payments to certain creditors before filing for bankruptcy can lead to complications. This involves paying back one creditor, such as a family member, friend, or business partner, significantly more than others. The bankruptcy system aims for equitable treatment of all similarly situated creditors.

The bankruptcy trustee has the power to “claw back” these payments, meaning the recipient may be forced to return the funds to the bankruptcy estate. For regular creditors, the look-back period for preferential payments is typically 90 days prior to filing. However, for “insiders” like relatives or business partners, this period extends to one year before the bankruptcy filing date.

Incurring new debt shortly before filing can be considered fraudulent, particularly if there was no intention of repayment. This includes taking out new loans, lines of credit, or using credit cards. Debts incurred with fraudulent intent are generally not dischargeable in bankruptcy. Creditors can object to the discharge of such debts, arguing they were obtained under false pretenses.

Taking large cash advances on credit cards shortly before filing can also be problematic. Cash advances over $1,250 from a single creditor within 70 days before filing are presumed non-dischargeable. This presumption aims to prevent debtors from “charging up” credit cards just before bankruptcy. While rebuttable, it creates a significant hurdle.

Making large luxury purchases on credit shortly before filing can also lead to non-dischargeable debt. Purchases from a single creditor exceeding $900 within 90 days before bankruptcy are presumed non-dischargeable. Luxury items are generally defined as goods or services not reasonably necessary for the debtor’s support. Examples include high-end electronics or expensive jewelry.

Continuing to use credit cards for purchases or cash advances after making the decision to file for bankruptcy can be viewed as fraudulent. This action suggests that the debtor had no intention of repaying the new charges, knowing they would soon seek discharge through bankruptcy. Such behavior can result in the debt being deemed non-dischargeable, leaving the debtor responsible for these specific amounts even after the bankruptcy case concludes.

Avoid Impairing Financial Records or Cooperation

Destroying or altering financial documents is a serious misstep before or during bankruptcy proceedings. All financial records, including bank statements, tax returns, pay stubs, credit card statements, and loan documents, must be preserved. The bankruptcy trustee will meticulously review these records to understand your financial history and asset holdings.

Tampering with or failing to provide these essential documents is illegal and can severely harm your case. This can lead to the denial of your debt discharge, meaning your debts will not be eliminated. It can also result in criminal charges for bankruptcy fraud.

Providing false information or intentionally lying to the court, the bankruptcy trustee, or creditors is strictly prohibited. All statements made in bankruptcy filings and during examinations are under penalty of perjury. Any misrepresentation or omission of material facts can have severe repercussions.

Lying or omitting information can lead to the denial of discharge for all your debts, leaving you fully responsible for them. It can also result in criminal prosecution for bankruptcy fraud, with penalties that include substantial fines, such as up to $250,000, and imprisonment for up to five years. The court may also dismiss your entire bankruptcy case.

Failing to disclose all assets and debts, regardless of their size or perceived insignificance, is a critical error. The bankruptcy petition requires a complete and accurate listing of every asset you own and every debt you owe. Even an honest mistake in omission can lead to serious consequences.

If assets are not disclosed, they may not be protected by exemptions and could be seized by the trustee. The debt associated with undisclosed assets might not be discharged, and the omission could lead to denial of discharge for all debts.

Changing bank accounts or excessively moving funds between accounts without clear justification can raise red flags. Such actions might appear as an attempt to hide funds from creditors or the trustee. The trustee examines financial transactions closely, and unusual patterns of transfers could trigger further investigation.

Intentionally reducing income or quitting a job right before filing for bankruptcy can be problematic. This action might be perceived as an attempt to qualify for a specific bankruptcy chapter or to defraud creditors by appearing less financially capable. The court may scrutinize such changes to ensure the debtor is acting in good faith.

Ignoring legal advice or court orders during the bankruptcy process can jeopardize your case. Following the guidance of your legal counsel and complying with all instructions and deadlines from the court and the bankruptcy trustee is essential. Failure to cooperate can result in the denial of your debt discharge and other penalties, as it indicates a lack of good faith participation in the legal process.