Bankruptcy Chapter 7 & 13

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Dos & Don'ts Before Bankruptcy

If the wolves are circling, but you aren't sure that you will have to file bankruptcy, there are some Dos and Don'ts which may protect some of your property if you do eventually have to file.

Do continue making payments on vehicles which you intend to keep.  Creditors secured by a car or truck can usually repossess the vehicle without notice to you anytime you are in default in your payments.  It will ordinarily take longer for other creditors (including those secured by other property) to act on a debt that is in default.
Note: If your car has been repossessed but not yet sold, you may be able to get it back if you file Chapter 13 immediately.

Don't borrow from or withdraw 401k, IRA, and ERISA qualified savings and retirement plans to pay bills.  Early withdrawal of these funds makes you liable for penalties and taxes which may not be discharged in bankruptcy.  ERISA and 401K funds are exempt from creditors in bankruptcy, as are IRA funds in Arizona (except deposits made within one hundred twenty days before filing) and many other states.  If you don't use these funds, you are very likely to have them to draw on after bankruptcy. [ARS � 33-1126.C]

Don't borrow money on your home to pay bills.  In Arizona, you can claim up to $150,000 equity in your home as exempt.  (Many other states have similar exemptions.)  This means you can go through bankruptcy, and still have this equity.  If you take out a second mortgage on your home, you may be converting debt which would have been discharged in bankruptcy into debt which you will still have to pay in order to keep your home.  These additional payments could be high enough to cause you to lose your home.

Dogive "friendly" creditors a security interest in non-exempt property.  If you have to borrow money from a friend or relative you could give that creditor a security interest in the property which you own. For example, if you have a car which is not exempt and you are borrowing money from a relative, he or she could take a security interest in the car for the loan.  This will reduce your equity in the car, and the likelihood that the trustee will take the car.  It will also protect your relative by insuring that they will be paid from the proceeds if the trustee does take the car since he must pay off creditors secured by property which he takes. 
Caution: The loan must be a legitimate transaction (you must actually receive the money), and the security interest must be granted at the time the loan is made. You cannot give a security interest for a previous loan. Giving a security interest for an existing loan could be a transfer of a property interest in fraud of other creditors which could result in a denial of your discharge. [� 727] All laws and formalities regarding secured transactions must be followed, such as placing the creditor's name on the title for loans secured by vehicles and the recording of a deed of trust for loans secured by real property.

Don't pay $600 or more back to relatives or business associates who have lent you money.  Payment of a total of $600 or more to an "insider" (which includes relatives and business associates) within one year before you file bankruptcy is a "preference." The trustee may recover preferences from the person that was paid and divide the money between all of your creditors.  In Chapter 13, you may have to increase the amount of your plan payments to cover the preference. (Payment of $600 or more to any other unsecured, non-priority creditor within 90 days before the case is filed may also be a preference.)  [� 547]

Don't put property you own into someone else's name to avoid it being taken by creditors or the trustee. That kind of transfer is a fraud on creditors and can result in your discharge being denied [� 727].  In addition, the trustee can take the property from the person to whom it was transferred [� 548].

Doreduce the amount of future income tax refunds.  Federal and state tax refunds are routinely taken in Chapter 7 cases, and may affect plan payments in Chapter 13.  If you expect to get an income tax refund, reduce your withholding so that you do not get refund.  If much of the refund is due to Earned Income Tax Credit, apply to get that refund as a part of your regular pay.  (Complete Form W-5, Earned Income Credit Advance Payment Certificate, available at www.irs.gov/pub/irs-fill/fw5.pdf or through your employer.  For more information, see the IRS web page Advance Earned Income Tax Credit Questions and Answers.)
Caution:  Don't reduce the withholding for tax so much that you will have a big tax bill to pay!


This page was last revised: 08/23/04