Legal Guide

Common Mistakes That Violate Bankruptcy Laws and Compromise Your Case

Recent trends have revealed that an increasing number of older Americans are tending to file for bankruptcy. A study ( based on the data gathered by the Consumer Bankruptcy Project reported widely by the American media, reveals that the rate of Americans of the age of 65 and more has tripled from what it was in 1991. Even though more and more people are turning to the bankruptcy court to survive, many of the applications are turned down due to various mistakes made by the applicants.

The federal bankruptcy laws have been framed in such a way that debtors who have not been able to manage their finances properly due to a variety of reasons like inadequate savings, spiraling medical expenses, vanishing pensions, etc. can get off to a fresh start while paying back the creditors as much as they can. However, more often than not, debtors make mistakes that can seriously compromise their bankruptcy case, sometimes even before it is filed. A quick look at some of the more common blunders:

Paying a Favored Creditor

The bankruptcy laws of America have been framed in such a way that all creditors are given fair treatment during the process. There is a very real concern that intending filers of bankruptcy will be inclined to pay off the loans that they have taken from family and friends or even creditors that they have a special relationship with before filing for bankruptcy. Favoring inside creditors, as they are known as, serves to deprive other creditors of getting a fair deal. As per the bankruptcy rules, any payment made to an inside creditor within one year of filing for bankruptcy is eligible to be recovered from the beneficiary by the bankruptcy trustee with appropriate litigation. There are ways by which, you can protect your cash during the bankruptcy proceedings and easily pay off the debt after the case is filed.

Taking On Additional Debt for Filing for Bankruptcy

Because most people tend to assume that they would not have to repay debts that they have taken on before filing for bankruptcy, they go on a spending spree with their credit cards or take payday or personal loans before making a bankruptcy filing. Incurring debt before a bankruptcy filing without any intention to repay the creditor is considered a fraud, and you can be prosecuted for a criminal offense. Undergoing a national debt relief program should be considered before deciding to file a bankruptcy application because with some effort you can get out of the debt trap.

Transferring Property before Filing for Bankruptcy

The bankruptcy trustee has the responsibility of scrutinizing all your financial transaction in the period before you filed for bankruptcy. If any property has been sold off for less than its market value or if the transfer itself does not seem to be equitable and honest, the trustee has the right to void the transaction and demand the property to be restored to the estate of the seller. It is not uncommon for persons intending to file for bankruptcy to transfer their property to another member of his family or even a friend or an associate and hide it from the bankruptcy court.

When this fraudulent activity is discovered, as it invariably is, there are multiple impacts; the bankruptcy court seizes the property, the application for the bankruptcy is denied, and, there could be a prosecution for committing bankruptcy fraud, a criminal offense. If indeed there is any need for selling or transferring the property for filing for bankruptcy, it is best to consult an experienced bankruptcy attorney who can give the best advice on the available options and the possible consequences.

Repaying Loans before Filing for Bankruptcy

If you have filed for bankruptcy and it is found that you have paid off loans or debts before doing so, the transaction is very likely to come under intense scrutiny by the bankruptcy trustee. If only one creditor or a select few have been repaid before the application was filed, it is quite likely that the trustee will make a demand for the money to be returned. In any case, repaying unsecured debt is not wise as that money can be used after the completion of your case to rebuild your finances.

Even repaying a debt that is secured is not free of problems as exceptions that can be granted under bankruptcy laws are applicable only to a certain amount of the equity in the asset owned by you. The equity is the difference of the market value of the property less the loans that have been taken with the property as collateral. The consequence of paying off a secured loan is that your equity in the property goes up. If that results in a situation where the equity exceeds the limit that you are allowed as an exemption, then the bankruptcy trustee will ask for the property to be included in the list of assets that can be liquidated to meet the demands of your creditors. The trustee may also instead ask you to pay the difference between the exception amount and the value of the equity in cash.

Cashing Out Retirement Funds

Retirement funds are completely protected from being used to pay off creditors in a bankruptcy and the bankruptcy trustee cannot touch it. Regrettably, people heading for a bankruptcy often overlook this protection and cash out their retirement funds fearing that it will be seized. This is a very big mistake as not only do they compromise their retirement security but also create a situation where their attorneys may not be able to protect the cash. The bankruptcy trustee may be able to recover any cashed out retirement funds that have been used to pay off creditors.  


Filing for bankruptcy should never be a hasty decision as you could end up making mistakes that will nullify your efforts. It is important that you approach it rationally, taking care to provide complete and accurate financial information in consultation with your attorney. This will prevent you from being disqualified and unable to protect yourself from being pursued by creditors.

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