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Bankruptcy Tips Before You File

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Your bankruptcy doesn't begin when you file. That's when the legal process begins, but your bankruptcy will ideally begin several months before that when you start preparing to file. Although preparing for bankruptcy doesn't get a lot of attention, it's an important part of the process and it shouldn't be overlooked. You can make your bankruptcy much easier by taking certain steps to make sure you're doing things correctly in the months before filing. In this blog we go over some tips you should consider if you're thinking about filing bankruptcy.


Credit Unions and Chapter 7 Bankruptcy

If you bank at a credit union you're considered a "member" and your "membership" is considered a privilege. When you file your chapter 7 bankruptcy petition, your privilege is going to be revoked and you'll no longer be allowed to bank with your credit union. This can happen for folks filing chapter 13 too, but we typically find that most of our Chapter 13 clients are able to maintain their financial accounts at credit unions. This means that if you're thinking of filing bankruptcy and you have a checking or savings account at a credit union, you'll want to move your money into an actual bank that's not a credit union.


Otherwise, you may lose access your your current income for a short time after filing bankruptcy until things can get sorted out and the credit union issues you your funds. This can create undue hardship and jeopardize your ability to pay for your basic living expenses for a period of time after filing. We want to make sure you avoid that, so it's best to be proactive and move to a new bank before filing.


We find that folks who are insured through their credit union are able to maintain their insurance...they'll still take your money it seems.


Cross Collateralization

Cross collateralization is a term used to describe a situation where a credit union uses one asset as collateral for any personal loans and credit cards you have with them. If car loan with your credit union and you have a loan or credit card with them too, then it's safe to assume your car is cross collateralized to your loan or car.


Here are the key takeaways to know about cross collateralization:


  • The credit union can and will repossess your car if you fall too far behind on your loan or credit card debt.

  • If you have a car that's cross collateralized with your unsecured debt, your choice is get rid of the unsecured debt and your car or keep your car and the unsecured debt.

  • The credit union will want you to reaffirm the debt and the car, meaning they'll want you to enter into a payment plan to repay the unsecured debt.

  • Filing for bankruptcy can provide protection against collection efforts from creditors, including credit unions.

  • You have options if you're facing cross collateralization at a credit union, it's important to consult with an Austin bankruptcy attorney to understand how cross collateralization may impact your specific case.


Automatic Payments and Withdrawals

In the months before filing your bankruptcy case, you should keep track of all of the automatic payments that come out of your account. Some creditors will cancel your automatic payments after you file because they're concerned about violating the automatic stay. This is why you want to have a list of every automatic payment that comes out of your account and the date that they are withdrawn. You'll also want to know certain basic information like your account number, the phone number you can call to make a payment online, and how to make a payment online in case your automatic payment is shut off.


Online Account Access

It's not enough to just rely on being able to make a payment online after you file bankruptcy. Although you'll still be able to make online payments to some creditors, others will shut off your online account access and tell you it's a privilege. You'll want to know how to make a payment over the phone and where you can send a paper check if this happens to you. We find that this really only happens with auto loans and that the reason the lenders do it is to force you to sign a reaffirmation agreement, but we've heard of it happening with other creditors on occasion. Either way it's always a good idea to know how you can make sure to pay them if they shut off your online account.


Taxes and Bankruptcy

If you have an obligation to file taxes then you need to file them before your bankruptcy. Failing to file your taxes before filing bankruptcy can cause some real issues and may lead to your case getting dismissed without a bankruptcy discharge. If you're filing Chapter 13 bankruptcy, you'll want to make sure you've filed for the previous four years.


Should You Continue Using Your Credit Cards Before Filing?

If you can help it then you shouldn't use your credit cards before filing bankruptcy. This means that if you're not filing an emergency bankruptcy petition because of a garnishment, to stop a foreclosure, or to regain possession of your vehicle after a repossession, then you shouldn't be using your credit cards prior to filing.


The bankruptcy code creates a presumption that you were at least considering filing bankruptcy 90 days before you actually file. For any additional debt that you incur within the 90 days before filing, this presumption is used against you to say that you knew you were filing and you had no intention on repaying any of the debt you incurred within the 90 days before filing.


Should I Keep Paying My Credit Card Debt Before Bankruptcy?

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If you know you're about to file bankruptcy then you should stop paying all of your unsecured creditors, like your credit card debt, personal loans, and medical bills. We know there are a lot of folks out there who are making all of their debt payments on time but struggling to do so and unable to plan for the future. If this is you, you may still have a good credit score and the thought of not making your payments on time makes you cringe. We get it, we actually hear this all the time, but here are two reasons why you shouldn't worry about your credit report and you should stop making your debt payments:


First, any payments that you make on dischargeable debts is just a waste. The debt is getting discharged anyway, so why throw anymore money at it? Second, if you pay any creditor $600 or more within the 90 days before we file your bankruptcy your trustee may want to ask the creditor for the money back. This can create delays and headaches for you, and it's best to avoid it if you can.


And if that's not enough, we also like for you to start living like you're going to after we file. We want you to stop paying the debt that's going to get discharged and we want you to live on your own money. We want you to feel what that's like (it's usually a huge relief for folks) and we want you to know that you can do it so that there aren't any surprises after we file.


Make sure you keep paying for things like your rent/mortgage, utilities, car payment (if you're planning on keeping your car) and insurance, student loans, and any tax debt.   

Preference Payments

Preference payments are payments made to certain creditors in the 90 days leading up to a bankruptcy filing. These payments may be considered preferential and can be recovered by the bankruptcy trustee.


Bankruptcy law allows the trustee to recover preferential payments in order to distribute the funds to all creditors fairly. This is done to prevent certain creditors from receiving preferential treatment and to ensure that all creditors are treated equally.


The following table provides an overview of the preference period and the maximum amount that can be recovered by the trustee:

Preference Period

Maximum Amount Recoverable

90 days before filing

Total payments made within the 90-day period

1 year before filing (to insiders)

Total payments made within the 1-year period

It is important to consult with a bankruptcy attorney to understand how preference payments may impact your specific case.


Repaying People You Owe Before Bankruptcy

When preparing for bankruptcy, you may get the idea to repay a debt to a friend or family member. While this is understandable, you should absolutely avoid it.


This is another area where the bankruptcy trustee may step in and ask for the money that you paid to your family or friend. As crazy as it may sound, when you repay your family or friend before bankruptcy your actually creating a personal liability for them, because the trustee may decide to ask them (your family or friend) for the money back. A lot of times the debtor will end up reaching some type of agreement with the trustee to keep the family member or friend out of their bankruptcy. But the point is to avoid this situation at all costs if at all possible.


Transferring or Selling Property Before Filing

Transferring or selling property may impact your case.


Selling property before filing isn't necessarily an issue as long as you make sure to sell the property for fair market value. If you sale it for less that it's worth then you may run into issues with the trustee. You'll also want to be careful about what you spend the money on, as sometimes folks wind up creating more of a headache for themselves when they get a chunk of cash before filing bankruptcy. If you have money sitting around from a recent sale, tax returns, or something else, and you're considering bankruptcy you should consult with our Austin bankruptcy attorney immediately to make sure that you're able to protect your money and your assets and have a smooth bankruptcy.


Transferring property is trickier although the same principle applies: If you're transferring the property you should be getting something in exchange that's equivalent to the fair market value of the item you're transferring. This is exactly where people run into trouble though. Most of the time folks are thinking about transferring things before bankruptcy because they want to "hide" or protect it from their bankruptcy. This is a real problem and is considered fraud. If you get caught doing this before filing, the bankruptcy court may dismiss your case and you may face additional consequences too.


Your Bank Statements Tell Stories

Your bank statements provide a snapshot of your financial affairs and tell detailed information about your income, expenses, debt payments. and more.


Here's the thing you need to know: The bankruptcy trustee is going to look at your bank statements for at least the six months before filing. The trustee is a bankruptcy and financial professional and they'll be able to decipher any suspicious activities. They'll also have an opportunity to question you at your 341 meeting (aka "meeting of creditors").


We always let people know this right away so they can keep this in mind as we get closer to filing their petition and so that they can bring any concerns to our attention immediately so we can discuss them and develop an necessary strategies to handle anything that may have happened.


Conclusion

Preparing to file bankruptcy is a process that ideally begins months before you actually file. There are a lot of things you can do to make the bankruptcy process smoother and there are certain things you should avoid if at all possible.


Personal bankruptcy provides real debt relief and gives you a fresh start, but it's more than just completing some bankruptcy forms. Working with our knowledgeable Austin bankruptcy lawyer can help you prepare for bankruptcy so that you can rest easy knowing that you're not creating headaches for yourself in the future, but that's only part of the reason you should reach out to schedule your consultation if you're struggling to repay your debt. We can talk with you about the different debt relief options (debt settlement, debt consolidation, and debt management plans), different types of bankruptcy, your monthly income and the means test, and we can help create a plan that gets you out of debt so that you can get on with your life. Book online or give us a call to schedule your free consultation today.


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