HELPFUL TIPS – DO’S AND DON’TS BEFORE BANKRUPTCY
TIP #1 – Do not withdraw from or take out a loan against a 401K, IRA or other similar retirement account to pay off or consolidate debt. Under Utah law, an individual’s interest as a participant or beneficiary to a retirement plan such as a 401(k), IRA, or other similar tax-deferred retirement plan is exempt from creditors in bankruptcy. Therefore, a consumer may file bankruptcy, eliminate or consolidate debt, and retain all funds in their 401(k), IRA or other similar retirement plans (except deposits made one year before filing). Early withdrawal results in tax liabilities and penalties which are not dischargeable in bankruptcy. A consumer should consider filing bankruptcy to resolve their financial problems and preserving this difficult-to-accumulate asset for retirement purposes only.
TIP #2 – Do not borrow money against a home to pay off excessive debt or consolidate debt. The Homestead laws in the State of Utah are presently very favorable to bankruptcy debtors. The present exemption for an individual’s primary residence is $30,000.00 per individual and $60,000.00 per couple. Therefore, consumers should seriously consider resolving their financial difficulties through bankruptcy debt consolidation (Chapter 13) or bankruptcy debt elimination (Chapter 7). They could claim the equity in their home as exempt and emerge from bankruptcy with the equity in their home intact. Incurring additional long-term debt against a home often results in excessively high payments which may place consumers at risk of losing their homes at a later date.
TIP #3 – Do not pay $600.00 or more to preferred Creditors before filing bankruptcy. Debtors must disclose in their bankruptcy schedules, payments to any single Creditor aggregating more than $600.00 within 90-days before filing bankruptcy. Debtors must also disclose payments of $600.00 or more to “insiders” including relatives and business associates within one year before filing bankruptcy. Bankruptcy law prohibits preferring one creditor over another, and payments to regular creditors within 90-days of filing bankruptcy, and to relatives or business associates within one-year of filing bankruptcy, are considered preferential payments. The Bankruptcy Trustee can recover any preferential payments made and divide the proceeds equally among your other Creditors.
TIP #4 – Do not put property you own into someone else’s name to prevent it from being taken by creditors or the bankruptcy trustee. Transferring assets into someone else’s name prior to filing bankruptcy to protect the assets from being taken by the Bankruptcy Trustee is fraud on Creditors and can result in a Debtor’s discharge being denied. In addition, the Bankruptcy Trustee can take back the assets from the person to whom they were transferred. Many assets owned by consumers are exempt which means they cannot be taken by a creditor or the Bankruptcy Trustee. Debtors owning non-exempt assets may retain all assets in a Chapter 13 bankruptcy case.
TIP #5 – Do not incur debt prior to filing including payday loans. Anything individuals do immediately prior to filing bankruptcy is subject to strict scrutiny. The Creditor may assume you never intended to repay the funds you borrowed and were committing fraud. Creditors could object to the discharge of the funds borrowed on this basis. They are more or less likely to object based on the amount an individual borrows.
TIP #6. SELLING NON-EXEMPT ASSETS – Individuals can sell non-exempt assets prior to filing bankruptcy provided the sale is an arms-length transaction. In summary, this means you can sell an asset for what it’s worth. A big no-no is to sell an asset for less than fair market value strictly to get it out of your name and protect it from the bankruptcy trustee. The transaction is likely to be more carefully scrutinized if the sale is to a relative. If you intend to sell an asset prior to filing bankruptcy, you should discuss the transaction with your bankruptcy attorney.
TIP #7. SPEND TAX REFUNDS PRIOR TO FILING – Collecting tax refunds in bankruptcy is an important issue for most bankruptcy trustees. If individuals filing Chapter 7 are expecting to receive a tax refund in the near future, the Bankruptcy Trustee would generally demand individuals to turn over the tax refund to the Trustee upon receipt depending on the amount of the tax refund and the date the taxes were filed. Standard advice from many bankruptcy attorneys to individuals filing around tax time would be to wait until they have received and spent a tax refund prior to initiating a Chapter 7 case. Remember not to pay or give your tax refund to friends or family members. Individuals often need advice as to how to spend a large tax refund prior to filing bankruptcy. In Chapter 13, individuals are almost always required to turn over their tax refunds to the bankruptcy trustee in the first three years of their bankruptcy case. Sorry, another complex issue you really need to discuss with a bankruptcy attorney. At Utah Bankruptcy Professionals we strategize with clients regarding their options with tax refunds and other tax issues.
TIP #8. SPEND CASH – A Chapter 7 Trustee could demand Debtors turn over to the Trustee, cash on hand on the date of filing in their savings and checking accounts or any cash on hand. Cash on hand and in bank accounts in a Chapter 13 case if relevant and can affect the amount of a plan payment.
TIP #9. CONSIDER INHERITANCES – Consider the timing of your bankruptcy as it relates to any inheritance you are expecting to receive. If within 180 DAYS AFTER you file bankruptcy you “acquire or become entitled to acquire” an inheritance—through the death of the person from whom you are inheriting—then the property being inherited is counted as if it was your property at the time you filed. (Section 541(a)(5) of the Bankruptcy Code.) You would be required to disclose it in your bankruptcy and probably turn it over to the Bankruptcy Trustee. This is another issue you must discuss with your bankruptcy attorney to preserve an inheritance especially if you are expecting to receive a large inheritance from a relative or individual in poor health.
BANKRUPTCY HAS BECOME INCREASINGLY COMPLEX AND SHOULD NOT BE ATTEMPTED WITHOUT THE ASSISTANCE OF AN EXPERIENCED BANKRUPTCY ATTORNEY. THE INFORMATION CONTAINED IN THIS HANDBOOK IS INTENDED TO INFORM YOU OF POTENTIAL ISSUES APPLICABLE TO YOUR FINANCIAL SITUATION WHICH SHOULD BE DISCUSSED FURTHER WITH AN ATTORNEY. THE INFORMATION IN THIS HANDBOOK IS NOT INTENDED TO CONSTITUTE LEGAL ADVICE DOES NOT ESTABLISH OR CONSTITUTE AN ATTORNEY-CLIENT RELATIONSHIP WITH UTAH BANKRUPTCY PROFESSIONALS OR ANY OF ITS ATTORNEYS OR ASSOCIATES.
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