TOP 4 MISTAKES PEOPLE MAKE BEFORE BANKRUPTCY
I have been practicing bankruptcy law in Minnesota for just under 10 years. At this point I have seen most mistakes that a person can make before filing. Most of them come because people think bankruptcy is more disruptive to their lives than it really is and do things that aren’t really necessary because they have been overthinking it.
1. Putting your money into someone else’s bank account.
This can seem like a good idea because then it feels like the money isn’t yours, so it won’t be touched. In reality, the bankruptcy courts always ask for bank statements or proof showing where someone’s money is going. The trustee will see right away that someone is earning money, but putting the money into someone else’s bank account.
- Money put into someone else’s bank account often counts as a fraudulent transfer. The court can ask the recipient to pay that money into the bankruptcy, even if the money was already spent by the person who filed bankruptcy. This is less likely if it is a joint account.
- What is the right thing to do if your money has been going into someone else’s bank account? First, talk to a lawyer for legal advice tailored to your situation. The lawyer will probably recommend that you get a prepaid debit card. These are issued by companies like netspend and greendot. They have some fees, but you can have a paycheck directly deposited onto it and then the money can be spent from the card. They also have a routing number and an account number just like a checking account for bill payments. So far, debt collection lawyers have not figured out how to freeze money that is held on one of these prepaid debit cards.
2. Transferring vehicles and land into someone else’s name.
This also seems like a good idea in the time before bankruptcy. If it isn’t yours, then you don’t risk it in bankruptcy, right? Wrong. Just like putting money into someone else’s bank account, if you transfer a car to a friend or sell it to a friend for $1, then you have made a fraudulent transfer. A fraudulent transfer is any time you exchange something of value for less than what it’s worth, or simply give it away. There are lots of public records searches that will turn up transfers like this.
- Most valuable things that a person needs to get by in life are protected in bankruptcy so long as you leave them in your name. If you transfer something out of your name, then it is no longer protected, even if it could have been protected before the transfer. Lawyers, including this one, offer a free conference and can give you advice about what to do with your assets, if anything, to make sure you protect as much as possible in the case.
- What do people tend to transfer away before filing: cars and trucks, rental property, and most often a deed in the family cabin.
3. Making payments on debts longer than necessary
Lots of people continue paying their credit cards and other dischargeable loans right up until the moment they file the case. This is throwing good money after bad. The debts go away completely when the case is filed, regardless of the amount. Usually you can save a thousand dollars or more per month by stopping paying the debts after a bankruptcy lawyer has vetted your situation to make sure bankruptcy would be right for you.
- What about credit score? It’s true that the payment history will help a little bit with your credit score, but after a year or so the difference will be negligible. Any loan you get in the year after bankruptcy will be mostly impacted by the bankruptcy filing itself, and a positive impact from a better payment history will be negligible.
- In general, I see people concerned more about their credit score than they are about whether they have any money in their checking accounts or not. The whole point of bankruptcy is that your credit score lowers for about 2 years, but you lose the debt and keep your assets so that you can start to have a positive net worth again.
4. Balance transfers and consolidation loans
A similar mistake is doing a series of balance transfers where you move the debt from one loan or credit card to another loan or credit card. People become accustomed to making payments every month and they don’t want anything to show up as late, so they often move balances from one place to another. You can take advantage of low promotional interest rates this way and sometimes delay payments for a month.
- Why is this a mistake? Because creditors can object to the discharge of NEW debts in bankruptcy. A balance transfer or consolidation loan is taking out a NEW debt to pay an OLD debt. the new debt might decide to try and file something into the bankruptcy to make their debt survive the bankruptcy. If you just let things stay the way they are, then your risks are much lower.
- In general, it’s best to avoid borrowing money or opening new loans to pay off old loans in the time before filing bankruptcy.