Mistakes to Avoid When Filing for Chapter 7 Bankruptcy
Chapter 7 bankruptcy can be a lifeline for those struggling with overwhelming debt. It offers a fresh financial start by discharging most unsecured debts, such as credit card balances and medical bills.
However, navigating the bankruptcy process without a clear understanding of the rules and requirements can lead to costly mistakes. These errors may delay or complicate your case, or even result in the dismissal of your case.
The Law Office of Marc G. Alster aims to highlight the common mistakes to avoid for those considering Chapter 7 bankruptcy and emphasize the importance of consulting an experienced bankruptcy attorney for personalized legal guidance.
An Overview of Chapter 7 Bankruptcy
Chapter 7 bankruptcy, is a legal process that allows individuals or businesses to discharge their debt and pursue a fresh financial start.
The basic concept behind Chapter 7 bankruptcy is that your assets, which cannot be protected under the Bankruptcy Code's exemptions, are liquidated (i.e., sold) to pay off creditors, and any remaining eligible debts are discharged, giving debtors "A Fresh Start"'. This means that you will not be responsible for paying back those debts in the future. Fortunately, for the overwhelming majority of Chapter 7 individual cases, the Bankruptcy Code's exemptions more than protect all of debtors' assets. See other article in the Bankruptcy Overview section of our website entitled, "Bankruptcy Exemptions".
While this may sound like an appealing option to get out of overwhelming debt, it is important to understand that Chapter 7 bankruptcy has strict eligibility requirements. It should not be seen as a quick fix or an easy way out without considering other options first.
Mistakes to Avoid When Filing for Chapter 7
Filing for bankruptcy can be a complex and often emotional process. Therefore, it is important to approach it with caution and avoid making mistakes that could potentially harm your case. Here are some common mistakes to avoid when filing for Chapter 7 bankruptcy.
Misjudging the Eligibility Requirements for Chapter 7
Eligibility for Chapter 7 bankruptcy is assessed through the completion of a means test, which evaluates your income against the median income for households of the same size as yours in your state. If your income is above the median income for your household size in your state, you may not qualify to file a Chapter 7 bankruptcy if the numerous deductions you are allowed to take in order to reduce your income still fails to get you under the median income. See other article in the Bankruptcy Overview section of our website entitled "The Bankruptcy Means Test". Debtors may also still qualify for a Chapter 7 discharge by demonstrating that their disposable income is insufficient to repay a material part of their debts under a Chapter 13 repayment plan.
Mistakes in calculating your income, allowable expenses, and even household size can skew the results of the means test. Be sure to gather all financial records, including pay stubs, tax returns, and expense lists, before consulting with and experienced personal bankruptcy determine if you satisfy the means test accurately, ensuring you meet the requirements for Chapter 7 bankruptcy. See other article in the Bankruptcy Overview section of our website entitled "The Bankruptcy Means Test".
Concealing or Omitting Assets
Failing to disclose all your assets or income is one of the most serious mistakes you can make when filing for Chapter 7 bankruptcy. It's essential to report every asset, from cash accounts to vehicles and real estate. Concealing assets is considered fraudulent and could result in your case being dismissed, fines, or even criminal prosecution. E.g., the right to sue any person or entity is considered an asset and a debtor's failure to disclose a right to sue a Third-Party, such as the right to seek damages for personal injuries, debtors can lose that right forever.
Don't assume that smaller items, such as collectibles or secondary bank accounts, will go unnoticed. Bankruptcy trustees perform thorough investigations, using tools like credit reports and public records to identify your undisclosed assets. To avoid complications, take the time to compile a complete list of personal property and financial accounts. An experiences personal bankruptcy lawyer can then review your documentation to ensure full transparency during the process and accurately advise you of all your assets will be protected under the Bankruptcy Code's exemptions.
Transferring Assets Before Filing
Transferring assets to your friends or family members before filing for bankruptcy may seem like a good way to protect your property. However, transferring any asset for less than its fair market value (hereinafter "FMV") is considered a Fraudulent Conveyance, as it is legally perceived as an attempt to defraud creditors, even if your motives were innocent. Such transfers can be reversed by the bankruptcy trustee and/or judge, while also potentially compromising your right to receive the sought after "Discharge Order", not to mention rendering your case much more expensive.
Federal bankruptcy law scrutinizes transfers made within two years of filing, and state laws in New Jersey and New York extend this review period significantly further. As such, it's strongly advisable to speak with an experienced personal bankruptcy attorney before initiating any asset transfers outside the ordinary course of your financial affairs, including the sale of any material assets for less than their FMV, so that you fully understand how any such transfers could impact your bankruptcy case.
Incurring New Debt
Using credit cards or taking out loans right before filing for bankruptcy can raise allegations of fraud. Bankruptcy Court's view luxury purchases or cash advances made within 90 days of filing (70 days for "household necessities") as proof that you had no intention of repaying these debts. Consequently, these transactions could be excluded from discharge by creditors or the bankruptcy trustee, leaving you liable to repay these debts after bankruptcy.
If you plan to file for Chapter 7, it is best to refrain from using credit once you recognize the need for bankruptcy. Additionally, stop any automatic payments on debts that will be discharged to avoid unnecessary expenses.
Neglecting to File Tax Returns
During the bankruptcy process, tax returns serve as evidence of your income and financial history. Failing to file the required tax returns can stall your case or even make you ineligible to file for Chapter 7 protection. Therefore, it is especially important to make sure all obligations to the IRS and state tax authorities are current before filing.
For New Jersey residents, it's essential to comply with all state tax laws. Failure to do so may complicate your filing at the federal level. If you’re unsure whether your tax filings are in order, a tax professional can guide you through the necessary steps.
Filing at the Wrong Time
Timing is critical when filing for Chapter 7 bankruptcy. If you are struggling financially, it may be tempting to wait until the very last minute before filing for bankruptcy in hopes of improving your situation. However, delaying the process can actually harm your case as it may appear that you are trying to hide assets or manipulate the system.
Filing too early, when creditors have not taken legal action but your debts are still manageable, could potentially lead to an unnecessary loss of assets. Waiting too long might result in lawsuits, wage garnishments, or liens on your property, which could complicate asset protection during bankruptcy.
It is important to file for bankruptcy when it is truly necessary and not wait until the situation becomes dire. A lawyer can evaluate your income changes, pending lawsuits, or asset liquidation risks to help you determine the most strategic time to file.
Not Consulting an Experienced Bankruptcy Attorney
Perhaps the most significant mistake is attempting to handle Chapter 7 bankruptcy without the aid of an experienced personal bankruptcy attorney. Bankruptcy law is complicated and involves strict rules and deadlines. Even minor errors can jeopardize your case, potentially leaving you at risk of losing critical protections or failing to obtain a discharge, and even losing your most valuable assets, including your home.
An experienced bankruptcy attorney will understand the nuances of bankruptcy law and can provide tailored advice for your situation. They can help you make sure all the necessary paperwork is filed correctly, protect your rights throughout the process, advise you as to how you can build up your credit score after filing for bankruptcy protection and explore alternative options if bankruptcy is not right for your situation (this is not to mention render the whole bankruptcy process exponentially less stressful for debtors).
Contact an Experienced Bankruptcy Attorney Today
Filing for Chapter 7 bankruptcy can be complicated and, therefore, requires careful planning and attention to detail. By avoiding these common mistakes and seeking the assistance of a knowledgeable and experienced bankruptcy attorney, you can minimize potential risks while maximizing the chances of being able to receive the sought after "fresh financial start".
When its main office located in Hackensack, New Jersey, The Law Office of Marc G. Alster is committed to guiding clients in the surrounding counties, including lower New York State, through the process of filing for personal bankruptcy protection. The firm serves clients throughout northern and central New Jersey, including Bergen County, Passaic County, Hudson County, Essex County, and Union County, as well as Rockland County, Westchester County, Orange County, and Putnam County in New York.
Contact Mr. Alster today to schedule a consultation and take the first step toward regaining control of your financial future.