Dealing with the weight of unmanageable bills can be overwhelming. If you are facing significant financial pressure, you might be tempted to file for bankruptcy protection as soon as possible without planning. However, knowing what to avoid before filing for Chapter 13 bankruptcy is critical for helping the process to proceed more smoothly. Here are some tips about things to avoid before you file for Chapter 13 bankruptcy protection.

Don’t file for Chapter 13 bankruptcy too soon.

If you’ve filed for bankruptcy in the past, you will want to know the rules for when you are eligible for a discharge under a second bankruptcy. While a Chapter 13 bankruptcy can allow you to receive a discharge of certain remaining unsecured debt balances after you complete a repayment plan, you can only receive a discharge in bankruptcy at specific intervals. If you file a Chapter 13 bankruptcy too soon after a previous bankruptcy, you will not be able to receive a discharge in the second case. Here are the intervals for when a second Chapter 13 can be filed to receive a discharge at the end of your repayment plan:

  • If the prior bankruptcy discharge was granted in Chapter 7, 11, or 12, four years from the filing date of the previous bankruptcy case
  • If the prior bankruptcy was a Chapter 13, two years from the filing date of the previous case

While you are waiting between bankruptcy filing dates, you might also face other problems that you will want to resolve before filing. For example, if you are accumulating significant medical debt because of an illness, it might be a good idea to wait to file for a new Chapter 13 bankruptcy so that it will include all of your accumulated debt.

Don’t wait too long to file for Chapter 13 bankruptcy protection.

In some cases, it is advantageous to file a petition for bankruptcy as fast as possible. For example, if you are facing foreclosure, have a wage garnishment, or are in danger of having your vehicle possessed, filing quickly might free up some money to pay your bills.

If a creditor has filed a lawsuit against you, you will want to talk to a bankruptcy attorney at the Shulman Law Office. Your lawyer will analyze the complaint to determine if it contains an allegation of fraud. If it does, filing for bankruptcy quickly rather than waiting might make sense. If the creditor receives a judgment against you for a fraud allegation, the debt will unlikely be considered dischargeable in bankruptcy.

After a creditor secures a judgment against you, the judgment will give the creditor lien rights. This allows the creditor to levy your bank accounts, seek a wage garnishment, file a repossession for your vehicle, or foreclose on your home. Filing for Chapter 13 bankruptcy might end further collection activities, including the lawsuit, so that you can have more time to catch up on your payments.

In some cases, it might be a good idea to file a Chapter 13 bankruptcy even when you haven’t reached the end of the waiting period to receive a discharge. The bankruptcy code does not contain a provision preventing you from filing a new bankruptcy case soon after an earlier one. However, filing a second Chapter 13 bankruptcy case immediately after a Chapter 7 will not result in a discharge.

When you file a Chapter 13 immediately after receiving a Chapter 7 discharge, it is sometimes referred to as a Chapter 20 bankruptcy. This can make sense if you have certain priority debts that you need more time to catch up on and that are not dischargeable. For example, if you have priority debts like child or spousal support arrearages, federal income tax debt, or are in danger of foreclosure, filing a Chapter 13 bankruptcy after receiving a discharge of your non-priority debts can make sense. You can use the repayment period in the Chapter 13 case to catch up on your payments and avoid other problems.

Do not take early distributions from your retirement account to pay debts.

Most types of retirement accounts are protected in bankruptcy. You should never take early distributions from your retirement to pay debts that would likely be included in your bankruptcy estate.

If you do, you will be using funds that would likely be protected. Taking an early distribution before reaching age 59 1/2 from your retirement account can also result in early withdrawal penalties from the IRS and other tax issues. If you are facing mounting bills that you cannot pay, it is a much better idea to talk to an experienced bankruptcy lawyer at the Shulman Law Office instead of taking money from your IRA or 401(k).

Do not provide incomplete, false, or inaccurate information.

When you are filling out your bankruptcy schedules, you might be tempted to leave out information about certain debts, income sources, assets, expenses, or financial history. However, you are required to provide complete and accurate information. If the bankruptcy court finds that you knowingly left something out or provided false information, you could face harsh criminal penalties, including up to 20 years in prison and a fine of up to $250,000.

If you fail to file all of the required documents, the court could dismiss your bankruptcy case or require you to file more documents to correct your paperwork and pay additional fees. Failing to name a creditor means that the creditor might not be included in your plan. Your bankruptcy lawyer can help you to ensure that your forms are completed correctly to avoid potential problems.

Do not accrue new debt.

You should avoid accruing new debt during the 90 days before you file for bankruptcy unless you had no other choice for paying for necessities. The creditor could object to your bankruptcy plan and argue that you committed fraud by taking out the loan without intending to repay it. Do not make luxury purchases with your credit cards or apply for loans within 90 days of filing your petition.

Do not transfer, sell, or hide assets.

When you fill out your bankruptcy paperwork, you will have to give information about any assets that you own. You might be tempted to transfer some of your assets to family members or friends or try to hide them. You should never do this. If you do, the bankruptcy court could dismiss your case. You might also face criminal prosecution. If you did sell some assets to pay your basic expenses, you will simply need to explain your transactions and supply any documents to support the reasons.

Do not fail to disclose anything.

When you file for Chapter 13 bankruptcy, transparency is required. Make sure to disclose everything to help your case proceed more smoothly and to avoid potential problems. After you fill out your paperwork, you will have to sign your petition and declare that you have provided complete and accurate information under penalty of perjury. If the court thinks that you attempted to defraud it, you could face criminal prosecution. If you have any questions about your bankruptcy schedules or forms, don’t hesitate to reach out to your attorney at the Shulman Law Office for help.

Do not make preferential payments.

The bankruptcy court has a 90-day clawback period for general creditors and a one-year clawback period for friends and relatives. If you have loans that you have repaid during these time periods, the bankruptcy court might consider the payments you made to creditors within 90 days or friends and family members within one year of the date you file your bankruptcy petition, the trustee can reach back and undo these payments. Bankruptcy is meant to place your creditors on an equal footing for fairness. Payments made preferentially to certain creditors over others may be considered to be preference payments and undone by the court. You do not want the bankruptcy trustee to file an adversarial proceeding against a close family member or friend to get the money you paid to them back.

Do not file for bankruptcy protection when you are expecting an inheritance or settlement within a year.

If you anticipate receiving an inheritance, lawsuit settlement, or another windfall soon, you should think about waiting before you file for bankruptcy. Once you receive the money, you might no longer be bankrupt. If you are in this type of situation, you should talk to a bankruptcy attorney at the Shulman Law Office to learn about the options you might have.

Do not fail to file your income tax returns.

Under the IRS rules, you are required to file all of your tax returns for tax periods ending within four years of the date you file for Chapter 13 bankruptcy. If you haven’t filed all of your returns, you should go ahead and file any that are missing before you file for bankruptcy.

If you owe taxes, they can be included in your bankruptcy estate and repayment plan. The repayment plan can give you time to catch up on what is owed. Tax debts are priority debts, meaning they will not be discharged in bankruptcy. However, having up to five years to catch them up can be helpful. Even if you have returns from longer than four years ago that you have not filed, you should file them so that all tax debts can be included in your repayment plan. The statute of limitations for the IRS’s ability to collect on tax debts does not start running until an assessment is made. This means that the statute of limitations for collections will not begin running until you file any missing tax returns.

Get help from the Shulman Law Office

Deciding to file for Chapter 13 bankruptcy is a big decision. If you are thinking about filing for bankruptcy protection, you should speak to an experienced bankruptcy lawyer at the Shulman Law Office to learn about your options. We can review your case and explain the type of bankruptcy that might work the best for you and other potential options to resolve your debts. Schedule a free consultation by calling us at 408.297.3333.