When you have overwhelming debt and no way to repay it, bankruptcy may be the only way out. Bankruptcy is a legal proceeding that allows individuals and businesses with financial struggles to reorganize their finances.

Although bankruptcy is not always a preplanned move, the steps you take before and during the bankruptcy filing can impact the outcome of your case. When you file for bankruptcy, you seek to protect yourself as much as possible. Unfortunately, some acts like giving away assets, hiding assets from creditors, and selective debt repayment can result in the dismissal of your case.

Failure to receive a bankruptcy discharge means you will continue to face financial struggles or undergo the process of another filing. Therefore, hiring and retaining a bankruptcy lawyer is critical if you or a loved one are on the verge of bankruptcy.

Some of the things you should avoid before filing for bankruptcy in California Include the following:

Filing for Bankruptcy at the Wrong Time

Filing for bankruptcy wipes out your debt and reorganizes your finances. However, you are only entitled to file once every eight years for Chapter 7 and once every six years for Chapter 13. Undergoing financial struggle only sometimes indicates that you need to file for bankruptcy.

It is essential to consider other issues that may arise after you have filed. If you have already filed for bankruptcy and hit a financial bump, creditors can garnish your wages, sell your assets, or even file a lawsuit against you. Before you file for bankruptcy, you can explore other options to solve your financial problems, including:

  • Credit counseling.
  • Debt consolidation.
  • Changing your budget and lifestyle.
  • Debt settlement.

Although rushing into bankruptcy is not the best option, you should also take your time. Under the following circumstances, it would make more sense to file quickly:

  • There is a wage garnishment order in place. When you file for bankruptcy, you will enjoy the automatic stay. The wage garnishment will stop, and you will have more disposable income to pay your debts.
  • A creditor files a lawsuit against you. Filing for bankruptcy before your creditor's lawsuit helps you avoid the struggle of trying to discharge a lawsuit settlement.
  • Your house is set to foreclose and you wish to use Chapter 13 to save the house.

Racking up on Credit Card Debt

When you know you are about to file for bankruptcy, it would be best to stop using your credit cards. When you file for Chapter 7 bankruptcy, the bankruptcy trustee will look into your spending for several months before the bankruptcy. If you must file quickly, you may need more time to stop accumulating credit card debt.

The most critical issue is ensuring that you don’t make charges to your credit card with the intention of erasing the debt through bankruptcy. Credit card debt is unsecured. Therefore, you will not be liable for the debt if you receive a bankruptcy discharge. However, creditors can object to the discharge if you rack up credit card debt to purchase luxury items.

This can be done by filing a lawsuit within your bankruptcy case. In this case, the creditors will only need to show that you accumulated a debt of up to $725 for luxuries up to 90 days before you filed your case. If such an objection is filed, you must prove to the court that the items you purchased were necessities.

Instead of accumulating credit card debt, you can stop making payments on the card. Although this could impact your credit score, you can build it back up after your bankruptcy discharge. Having missed payments on your credit report is better than dealing with a dismissal of your bankruptcy case.

Selective Debt Repayment

For creditors who lose their money through a bankruptcy discharge, you may have no chance to receive additional debt when your bankruptcy case ends. Therefore, most people are tempted to pay creditors selectively. Preference payment ensures that all your creditors have an equal chance to receive payment.

The look-back time for preferential payment is ninety days for outside creditors and a year for insiders. A preferential repayment can be undone in bankruptcy. This means that your bankruptcy trustee can file a petition to recover the money from the creditor and disburse it in equal shares to all your creditors.

Increasing your Pay by Working Overtime or a Second Job

When you are undergoing financial struggles and have no way to pay your debts, the most logical thought is to increase your income. This would allow you to pay your bills and avoid the bankruptcy option. You can increase your income by finding a second job or working overtime.

Unfortunately, the extra income you receive will help you pay your bills and raise your income. Your average up to six months before filing for bankruptcy is critical in determining the chapter of bankruptcy you can file.

The increase in your income could cause you to fall above the state median income. This means you cannot file for liquidation bankruptcy. Instead, you must file for bankruptcy under Chapter 13. With Chapter 13 bankruptcy, you make a repayment plan to pay your creditors. Even after filing under Chapter 13, the increased income will increase the monthly installments on your debt repayment.

If you are considering bankruptcy to solve your financial struggles, holding off on increasing your income would be best.

Selling your Assets

Selling or transferring the property you could lose in Chapter 7 bankruptcy is not a good idea. Although it is allowed in some situations, you could face severe consequences when you do it wrong.

Filing for bankruptcy does not mean that you will lose everything. The bankruptcy exemption covers some properties and you may be able to protect them from creditors. These include:

  • Equity in your motor vehicle and primary residence.
  • Retirement accounts.
  • Lawsuit settlement benefits.
  • Household items and clothing.
  • Your tools of the trade.

The non-exempt property will be liquidated to pay your creditors in Chapter 7 bankruptcy. For Chapter 13 files, you must pay to keep the property. It is only okay to sell assets when you need money for necessities like food, rent, and utilities.

Whether or not the transfer and sale of the property before bankruptcy will put you in legal trouble depends on the following factors:

  • Whether the property is non-exempt or exempt.
  • The time you transferred the assets. How long ago you sold or moved an asset may help determine if the sale was aimed at protecting the property from liquidation.
  • Whether or not you receive a fair price for the property. The amount you receive from your pre-bankruptcy property sale shows whether you intend to defraud creditors. You can only pay some of the creditors if you receive a low amount for the property.
  • Reasons for property transfer. From your testimony, they could attempt to infer the reasons for the property sale or transfer.
  • How you used the proceeds of the sale. The bankruptcy trustee will scrutinize how you used the property sale proceeds before your bankruptcy. You could face trouble with your bankruptcy case if you favor some creditors or purchase luxury items.

Lying About Your Assets

Bankruptcy is a transparent process. If you want to discharge your debts or reorganize your finances through a repayment plan, you must be honest about your income, assets, and debts. Some of the information you need to disclose when filling out your bankruptcy petition forms includes:

  • Sources of your income.
  • Details of previous and ongoing repossessions and legal actions.
  • Property transfers you have made before bankruptcy.
  • Losses you have incurred from theft or fire.
  • Property or money you are holding for another person.
  • The status of your business.
  • A list of all your assets and bank accounts.

People often hide assets in bankruptcy by lying about what they own or transferring the assets to family and friends. A bankruptcy trustee investigates your case through online searches, public record searches, and bank account records to determine if you have hidden assets. If you engage in an act intended to hide assets from your bankruptcy, you could suffer the following outcomes:

  • You will not receive a bankruptcy discharge.
  • The bankruptcy trustee can resolve your discharge.
  • You cannot discharge the debts involved in a subsequent bankruptcy.
  • You could face criminal charges.

The consequences of hiding assets from bankruptcy are severe. Unfortunately, there are times when an honest mistake could be viewed as an attempt to defraud your creditors. Therefore, seeking the guidance of a bankruptcy attorney is vital.

Failure to Seek Legal Guidance

Bankruptcy is a complicated process for the average person. If you make the wrong move or take the wrong action before or during a bankruptcy filing, you can be denied a discharge or face criminal charges. Therefore, hiring a knowledgeable bankruptcy attorney is critical to ensuring that your bankruptcy process is quick and correct. The benefits of having legal guidance in your bankruptcy case include the following:

  • No harassment from creditors. Bankruptcy grants you an automatic stay. This means that creditors are not allowed to call you. However, some creditors may still attempt to harass you, seeking payment for the debts you owe. Your bankruptcy attorney can handle these creditors and save you the headache.
  • Avoid the fear of uncertainty. Bankruptcy is a very confusing process. However, when you hire a bankruptcy attorney, you can ask them questions that may be lingering in your mind. This makes the process easier for you.
  • Avoid filing mistakes. A competent bankruptcy lawyer will guide you through filling out the appropriate paperwork and avoiding mistakes that could cause your case to be denied.

Withdrawing from your 401K

Most individuals on the verge of bankruptcy view their retirement accounts as a ready pool of money to save them from Chapter 7 or Chapter 13 bankruptcy. An attempt to solve your financial problems using your retirement account can cost you more when you file for bankruptcy.

If you are under the retirement age, withdrawing money from your retirement account could carry a heavy tax penalty. When you file for Chapter 7 or Chapter 13 bankruptcy, you can protect your retirement benefits through bankruptcy exemptions. However, if you withdraw the money from the retirement account and purchase an asset or use it for debt payment, you can no longer protect it from creditors.

Failure to File Tax Returns

If you receive disability insurance, you may not be required to file tax returns. In this case, you will not have to worry about tax issues in your Chapter 7 bankruptcy case. If you are liable for filing the tax return, the tax returns help determine your income. Therefore, failure to file taxes up to two years before bankruptcy can create significant problems in your bankruptcy case.

Completing your bankruptcy petition and making a repayment plan for Chapter 13 bankruptcy may only be possible with relevant tax returns.

Filing for Bankruptcy After Receiving an Inheritance or a Valuable Asset

If you receive an inheritance, a lawsuit settlement, or an income tax refund, you may be able to pay some of your creditors, and you will no longer be bankrupt. Therefore, if you are about to receive substantial funds, you should reconsider declaring bankruptcy.

Find a Experienced Modesto Bankruptcy Lawyer Near Me

No one prepares themselves to go bankrupt. However, there are times when declaring bankruptcy is the only way to save an individual or business from overwhelming debt and financial struggles. Before you declare bankruptcy, you could explore numerous measures to reorganize your financial life, including finding a new job, selling assets, and taking another loan.

Most of the actions you take in the year before filing for bankruptcy may significantly impact your ability to receive bankruptcy relief. Therefore, if you are experiencing financial problems, consider bankruptcy as an option.

This allows you to be careful with your actions, steps, and financial decisions. If you are considering bankruptcy for your finances or business, it is essential to have the insight of a skilled bankruptcy lawyer. Your attorney will advise you on what to avoid before bankruptcy and guide you through the process.

At Modesto Bankruptcy Attorneys, we offer top-notch legal guidance to all clients considering bankruptcy in Modesto, CA. Call us today at 209-314-3010 to schedule an appointment.