What Are Two Things I Should Not Do Before Filing For Bankruptcy?

I see people make many mistakes when filing for bankruptcy. It could be in their paperwork or it could be failing to plan appropriately. Here are the top two things that people do wrong when filing for bankruptcy protection.

Using Your IRA, 401K or other Qualified Retirement Plan.

Bankruptcy exemptions protect your IRA, Inherited IRA, 401K, etc. from creditor’s claims. Why then would you use that money to pay unsecured creditors. In a nutshell, these assets are protected from creditor’s claim either inside or outside of bankruptcy. So, if a debt collector tells you that your 401K will be garnished, he is lying. Also, if your kids are hitting you up for a loan, and your only source for the funds are your retirement plan, it may hurt, but you need to tell them no.

Preferential Transfers (Paying back friends or relatives before filing)

The bankruptcy code was designed to protect both debtors and creditors. In this way, the debtor will be protected from their creditors and creditors can be assured that actions taken by the debtor will be scrutinized to prevent debtors from liquidating all their assets prior to filing. Well, a preferential transfer to a friend or family member prior to filing for bankruptcy protection is a big no-no. It’s not that we don’t want Mom and Dad to be repaid, it’s just that we don’t want them to get paid to the detriment of the other creditors. Here, the bankruptcy can and will sue the friend and family member to get the money back into your bankruptcy estate.