Legal Strategy vs. Bankruptcy Fraud
Once you have decided that bankruptcy is your best option, and you've determined the type of bankruptcy that is best for your situation, you will want to begin planning for it. This may sound odd, because no one plans for bankruptcy, but you do want to be aware of what you can and cannot do prior to bankruptcy, and what options you have to get the most out of your case.
Unless there is an emergency and you need to file immediately, in the months prior to filing you will want to consider a few things. You will need to get the mandatory credit counseling out of the way. This can be done online and usually takes about 45 minutes to an hour. In this session you will develop a repayment plan, whether you can afford it or not.
This is simply a stipulation of the bankruptcy law designed to educate debtors on other options available. Once that is done, you can begin making some decisions regarding your case, your finances and your assets.
Important Things to Avoid
There are a couple of things to avoid doing prior to filing for bankruptcy.
Do Not Use Retirement Funds
Many people are tempted to delve into a 401k or other retirement asset to pay back loans from friends or even banks. This is a bad idea. Your retirement assets are protected by bankruptcy so you don't want to touch that money. If you really feel compelled to repay friends, do so after your bankruptcy is completed. Payments to one creditor before a bankruptcy can often be considered a "preferential transfer," and will likely be ordered back into the bankruptcy estate by the court.
Do Not Transfer Assets Away
It may be tempting to transfer some assets to a family member to keep them out of your bankruptcy. This is bankruptcy fraud and will cause you a lot of trouble. You do have legal ways to protect these things, which will be discussed later in this guide.
What You Will Want to Plan For
There are a few different things you will want to think about prior to filing your bankruptcy petition.
First Steps
- Consider what bills to stop paying
- Protect your cash accounts from banks with which you also have a credit line
- Think about how you use your credit cards
Next Steps
- Plan to protect any non-exempt equity (Primarily for a chapter 7 case)
- Establish and/or modify your monthly expenditures (Primarily for a chapter 13 case)
1. Your Bills
Since you know you will be filing bankruptcy, you will want to think about what monthly bills can be ignored in order to save some money for the case and your own personal needs.
In general, you can stop worrying about making payments to most unsecured creditors, such as credit cards, medical bills, etc. However, you will want to keep paying towards any family support obligations and student loan debts.
You will want to keep up on the following bills:
- Car Payment – You need something to drive
- Housing (Rent or Mortgage) – You need somewhere to live
- Utilities – You want to keep the lights on
If you have already fallen behind on your mortgage, then you can probably continue to let that go, but realize that you will need to pay this at some point. You probably have about three to six months before any serious action is taken, at which point your bankruptcy case will start and you can work out a solution.
2. Bank Accounts
If you have cash accounts at a bank to which you also owe debt (credit cards, mortgage, home equity loans), then you may want to take the cash out and put it into a new account at a different bank. The reason is that many banks have stipulations in their contracts with you that allow them to withdraw funds from one account to pay deficiencies in other accounts. This can only be done within the same bank, so opening a new checking account at another bank is a safe way to go.
3. Use of Credit Cards
There are some rules to be aware of regarding the use of credit prior to filing for bankruptcy. Generally speaking, anything you do in the 90 days prior to filing will be closely scrutinized by the bankruptcy trustee assigned to you. If you purchase any luxury items on credit just prior to your case, then the creditor will likely object to the dischargeability of the debt, and the court will be inclined to sustain it. This is especially true if you purchase something on a credit card that is out of character, such as buying an expensive new watch when you normally don't buy such things.
Exceptions to Credit Card Transactions
There are some things you can do, even though you know you're going to file for bankruptcy. For example, you can take a cash advance on a credit card of up to but not exceeding $750 in order to pay your bankruptcy lawyer and court fees. Anything more than $750 will be considered fraudulent activity. Keep in mind, any use of credit card in the three months prior to filing will be subject to non-dischargeability, so you may want to talk to an attorney familiar with your area, more specifically familiar with the trustee in your area, before making any purchases or cash advances.
4. Property and Exemption Planning
In a chapter 7 case, one of the most important parts of pre-bankruptcy planning is maximizing the amount of equity protected by your state (or federal, if available) exemptions. The best way to begin this process is to download Schedule B of the bankruptcy petition from the US Court website and use it to outline all of your most important property and assets.
List Your Property and Assets
The good thing about Schedule B is that it has different sections for different types of assets that correlate roughly with the way bankruptcy exemptions are organized. This will allow you to match up your important property with the appropriate exemptions and determine if there are any areas where you may be susceptible to losing equity.
This form lists a lot of categories that you don't need to worry about, such as household furnishings and clothing, unless you own an antique table worth $200,000, of course. What you do want to worry about are the readily liquid things like cars, real estate, cash accounts and that pile of cash under your mattress.
Assign Value to Property
When it comes to determining the value of your important property, you want to use its assessed value as opposed to its replacement value. For example, if you own a 2009 Toyota Camry, use what you think you could get for it on Craigslist or local classifieds.
If you own expensive musical equipment, which is more difficult to sell, the value should be what you would get for it at a garage sale or by selling it to a local music store, not what you would expect to pay if you were buying it.
Match Up Exemptions
Once you've got your property listed, match each line item with the corresponding exemption in your state, and begin looking for areas where your property and asset equity exceeds the exemption available. Keep in mind that you want to use your equity, not the value of the property. This means if you have a car worth $20,000 and a loan against it of $15,000, you'll need $5,000 in exemption protection to cover that equity.
You should also be aware that many states offer a wild card exemption that can be used to cover any non-exempt equity up to a certain amount. Additionally, some states allow you to use an unused portion of your homestead exemption to cover other equity.
Strategy for Maximizing Exempt Assets
It may be tempting to "give away" non-exempt assets to a friend or family member only to retrieve them after your bankruptcy is complete, but this is considered bankruptcy fraud and is not only a great way to get your case dismissed, but also a potentially criminal offense. However, there are some things you can do if you find that you have significant assets in excess of your available bankruptcy exemptions.
- Sell Property – It may make sense to sell a non-exempt car (assuming you don't have a loan against it) and put that money into an exempt asset such as paying down your mortgage.
- Use Non-Exempt Cash – Similarly, you can put non-exempt cash into your mortgage or towards a retirement fund. Both of these are legitimate ways to protect your equity.
It can be a fine line between acceptable bankruptcy planning and doing something that may be considered fraudulent, so you will want to talk to a lawyer before taking any potentially dangerous steps.
5. Your Monthly Expenses
If you are planning a chapter 13 bankruptcy, then you will want to consider your monthly expenses, or more importantly, how you can increase your monthly expenses to minimize your net monthly disposable income. In a chapter 13 bankruptcy, you will enter into a monthly payment plan that is based on your monthly disposable income. The lower this number is, the smaller your monthly payment will be, and the less debt you will end up repaying.
Maximize Your Expenses – Minimize Chapter 13 Payments
There are a few different things you can do to minimize your disposable monthly income. Here are some of the most common:
- Increase Your 401k Contribution – Money put toward your retirement assets is a perfectly acceptable monthly expense, so you want to max this out.
- Get or Increase Life Insurance – Insurance expenses are allowed, so now may be a good time to think about that.
- Get Better Health Insurance – This can be an excellent opportunity to get better health insurance coverage with lower co-pays.
Then there are some not so common ways to increase your monthly expenses. These are more risky, but if you can get confirmation from your attorney that it's okay, then you can consider the following:
- Buy a New Car – In some cases buying a new car before filing for chapter 13 may make sense. It will reduce your disposable income and lower the amount of money paid toward credit cards and other unsecured dischargeable debts.
- Refinance Your Home – If you are in an interest only loan, you may want to consider getting into a traditional 30 or even 15 year mortgage if you can afford it. It's always best to pay towards your equity as opposed to debts that will be discharged upon completion of your chapter 13 plan.
This is by no means an exhaustive guide on pre-bankruptcy planning. There are a lot of subtleties in a bankruptcy case, and the laws, especially case law, can vary from state to state and even among different districts in the same state. Having an attorney advise you on your options is ultimately the best way to make sure you get the most out of a bankruptcy.
Next Steps
8. Completing the Bankruptcy Forms
9. Bankruptcy Hearing: What to Expect
10. Your Credit After Bankruptcy
Thinking About Bankruptcy?
