Filing for bankruptcy is no less than a life-changing experience for most applicants. In order to turn this experience into a positive one, there are certain things one must do. Similarly, it is also important to avoid certain mistakes that can prove to be expensive.
Before discussing the dos and don’ts, please note that there are two types of personal bankruptcies. Chapter 7 bankruptcy relieves the applicants completely from all their debts and is the more appropriate option for individuals with extremely high debts and low income. On the other hand, chapter 13 bankruptcy involves creating a plan for the repayment of the debt partially or fully, over a period of three to five years.
Here are some of the things you must do prior to filing bankruptcy.
- Start gathering all your important financial documents such as bank statements, credit report, proof of income, tax details for two years, and lawsuit information related to any legal proceedings against you. It is also good to have a car loan statement, mortgage statement, collection letters, and copies of bills because your attorney may need them.
- If you are currently banking with an institution that you already owe money, think about opening a new bank account. Once the bankruptcy is filed, your existing bank may close the account.
- If you have already retained an attorney, it is a good idea to refer all collection calls to him or her. This, however, is not the case when you are after the loan modification process without any involvement of an attorney. In general, all collection agencies can be referred to your attorney.
- Do not hesitate to ask questions of the attorney and always keep him or her informed about the changes in circumstances if any. Contact your attorney immediately in case of any questions or doubts.
In addition to doing certain things correctly, it is also important for you to avoid certain mistakes.
- Lying about assets: In chapter 7 bankruptcy, the applicants are required to disclose all their income and assets. The applicants’ capacity to pay is determined on the basis of this information. However, it is never recommended to conceal any of your income or assets to ensure qualification. This may result is a dismissal of the case and even a ban for the applicant on filing those debts in the future.
- Giving away assets to family members: One major red flag is giving away property, cash, jewelry, cars, and other valuables to relatives or friends with an understanding of taking it back from them at a later stage. This is an extremely unethical practice and may lead to serious problems.
- Increasing credit card debt: Oftentimes, applicants want to utilize their available credit before the bankruptcy filing. Please remember that all credit purchases made within a period of ninety days from the date of filing are excluded from the bankruptcy. The safest option is to stop using credit cards as soon as you make up your mind to file bankruptcy.
- Taking new debt: Taking on new debts can be extremely irresponsible on your part and the best approach is to avoid all types of new debts if you have already decided to file bankruptcy. All of that said, when you have reconsolidated and know that you are once again able to manage debt, it is a good idea to find a new lender in order to help rebuild your credit. Bankruptcy auto loans are a common solution here, as they give the borrower a way of proving themselves credit worthy that also solves their transportation needs.
- Failing to file income tax returns: If you are a regular taxpayer and haven’t filed taxes for two years prior to filing bankruptcy, you could well be in for some trouble. In the case of chapter 13 bankruptcy filing, the processing is almost impossible without tax returns because the IRS has no other ways to determine an applicant’s tax obligations.
- Ignoring a lawsuit: Never ignore any lawsuit that has been filed against you and immediately provide a copy to your attorney.
- Don’t withdraw funds from retirement accounts: Avoid withdrawing any money from your retirement accounts for the purpose of debt repayment.
We understand no one ever wants to be declared bankrupt. These are just a few guidelines that can help avoid some hassles out of this hard financial situation. May this decision turn out to be the reset button for your financial status.
