In my 38 years as a bankruptcy lawyer, I have met with thousands of clients who had been struggling trying to pay their debts. None of them rushed into my office happy to be there. But when they learned that a real solution to their debt problems was available, the relief from the stress they had been carrying with them was palpable.

Unfortunately for some of these clients, their resistance to finding out earlier about their bankruptcy options had led them to take steps which ended up making their financial situation worse than if they had filed bankruptcy first. What are some of the steps you may want to avoid before you file for bankruptcy?

Taking Out a Home Loan to Pay Other Debts

If you are a homeowner with equity in your home, you may be considering refinancing your home mortgage or getting a home equity second mortgage and using the money you take out to pay off your other debts. This could turn out ok if you have a very stable source of income, the new home loan or second mortgage fits comfortably in your budget, and you will no longer have problems paying your bills.

But if you will still have a hard time balancing your budget, or your continued source of income is questionable, this step could make things much worse. When filing for bankruptcy, you are allowed to protect a certain amount of equity in your home. That amount varies in each state, but in California, the homestead exemption allows many bankruptcy debtors to save their homes and their home equity while discharging (wiping out) their other debts. But the mortgage debts ust still be repaid to keep your home.

If you have already used your home equity to pay those other debts, you will have turned debt that could be forgiven in bankruptcy into mortgage debt that you must always pay to avoid losing your home in foreclosure.

Borrowing or Taking an Early Withdrawal from a 401k

I have met with many clients who have taken loans from their retirement plans to pay off some of their credit card debts before having to file bankruptcy later, because they still ended up unable to pay all their debts, including the new retirement plan loans. Failure to pay those retirement loans will lead to defaults which convert the loans into taxable income and possible early withdrawal penalties. Other clients have already taken withdrawals from their retirement plans, triggering hefty income taxes and early withdrawal penalties.

The problem created here in both cases is that 1) you may not be able to afford paying the retirement loans or the income taxes resulting from the withdrawals, 2) you may still need your retirement savings when you do retire, and 3) bankruptcy will not wipe out recent tax debts. Once again, you may be using a valuable asset which can be protected in bankruptcy (your retirement savings), and creating a debt which will not be resolved in bankruptcy, to pay off debt which could have been wiped out in bankruptcy.

Consolidating Your Debts With A Brand New Loan

Many clients who are struggling with their debts have sought out new loans to consolidate their debts, only to find that they still are unable to fit their new loan payments in their budgets. This can create complications if they need to file for bankruptcy very soon after, because the bankruptcy laws provide some protection for creditors if the debts are found to have been incurred without the intention to repay them. In those cases the debts will not be wiped out in bankruptcy. Most clients are not aware of this and do have honest intentions to repay their debts, but getting a new consolidation loan may delay the timing of when you should file for bankruptcy.

Borrowing From Family Members or Friends

Some clients have borrowed money from family members or close friends to try to pay off their debts. This can work out if all your debt problems are really resolved and you once again have a budget that works. These loans can be from those who are very well off or from family members or friends who really depend on getting repaid to keep their own finances straight. But if the loans are only providing a partial or temporary fix for your financial problems, you may have borrowed money that you will always feel the need to repay, when bankruptcy could have wiped out those other debts.

These are some fairly common actions I have found that many clients have taken before they learned how bankruptcy works, how it can protect them, and how it can restore stability in their lives.

If you are having trouble paying your debts today, you would be well advised talking to an experienced bankruptcy lawyer to find out if bankruptcy would be a better option before digging a deeper hole for yourself.