When it comes to filing for bankruptcy there many positive benefits, on the other hand the media still likes to draw their attention to the negatives. When considering the positives versus the negatives in a bankruptcy filing, the positives always win. The reason is the negatives will be there for the individual filing bankruptcy regardless if they file or not. For someone who cannot pay their bills, their credit is going to be in the tank and Chapter 7 bankruptcy won't make it any worse but could actually help by lowering the individual's debt ratios after the bankruptcy discharge. In fact, many people will leave Chapter 7 bankruptcy being debt-free from any unsecured debt. This is a powerful statement knowing that credit card debt has become one of the biggest problems for middle America.
Since you know that filing bankruptcy is not a bad thing, it's important to understand what not to do and to make sure to listen to your bankruptcy attorney. The bankruptcy attorney is not creating a bunch of extra paper work for an individual to complete for fun. All of this is necessary to be able to file a bankruptcy petition successfully.
The first thing to remember is successful bankruptcy planning is of utmost importance. Because of this the bankruptcy attorney will typically advise their clients prior to filing bankruptcy to not borrow from their retirement plan. It's foolish to pay down credit card debt with something that is protected by a bankruptcy exemption. Creditors cannot touch a 401(k),IRA or any pension, it's off-limits.
Next, don't take money out of your account to pay back family members first prior to filing bankruptcy. It's understandable to try to pay off friends and family members prior to the filing, but the bankruptcy trustee might see it as preferential treatment. They could even ask for the money to be returned to the bankruptcy estate and dispersed amongst creditors.
Another no-no that a bankruptcy attorney will tell their clients to avoid is transferring assets when the financial trouble begins. If a person has any idea they will be filing for bankruptcy, it's best not to sell or transfer any property as it will look to the bankruptcy trustee as a planned protection of assets. The best that could happen out of this is the assets will be taken back and given to the creditors. The bankruptcy trustee could also charge the individual filing with fraud in an attempt to keep the property away from the creditors.
It's common but not good practice for an individual filing for bankruptcy to exhaust their savings to pay unsecured creditors after losing a job or having a drop in income. If Chapter 7 bankruptcy looks like it might be on the horizon, it's stupid to burn through any liquidity that one might have. If you're going to pay somebody, pay a secured creditor like a mortgage company or auto loan. These will not be included in the Chapter 7 unless the individual wants to surrender the property prior to the bankruptcy discharge.
These are all things that should be discussed with a bankruptcy attorney prior to filing. Sometimes if mistakes are made, the bankruptcy attorney might delay the filing to let some of these errors fall to the wayside.
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