A lot of people have the misconception that filing for bankruptcy is the easy way out. This could not be any further from the truth. Bankruptcy is not an escape route that frees you from all the financial shackles that had kept you confined. Instead, bankruptcy is a form of acknowledgement of the fact that your finances are beyond your control and that you need to make a fresh start in order to get back on your feet in life.
Therefore, it goes without saying that a certain degree of planning and preparation should precede the act of filing for bankruptcy. Life after bankruptcy is never the same as life before it. If you do not plan in advance and follow the advice of the experts, you will find yourself in a precarious position after you have filed for bankruptcy.
The following is a list of ten important things that you need to do before declaring bankruptcy. The list has been compiled in order of significance.
1) Speak to an Experienced Bankruptcy Attorney as Soon as Possible
It can be very difficult to mentally prepare yourself for bankruptcy. This is why people are often in denial right until the final moment when they are left with no choice but to file for bankruptcy. Even when you are not ready to go bankrupt, you should seek the counsel of an expert and experienced bankruptcy attorney for the sake of your own benefit. The attorney will provide you with all the information that you need to make educated decisions going forward. The attorney will help create a non judgemental environment where you can voice your grievances and problems, and openly discuss all possible solutions without facing the fear of being looked down upon as someone who is on the brink of bankruptcy.
2) Review Your Expenses
Your monthly expenses must be reviewed prior to declaring bankruptcy. In fact, you are strongly advised to go through all your expenses and review your bank statements even before you sign up for a consultation with a bankruptcy attorney. This will help you get a clear picture of where you stand and how much financial trouble you really are in. A thorough review will also allow you to have a better understanding of where your money is going every single month. Once you do that, you can determine whether you have any disposable income that can be used to pay off your debts.
3) File All Your Tax Returns
When you file for bankruptcy, you are required by law to provide your tax return for the previous year or the current year upon request. In the case you file to file your return that is due after you have filed for bankruptcy, the IRS can request your bankruptcy case to be dismissed. Filers of Chapter 13 bankruptcy are required to file all of their tax returns for the previous 4 years. Unless you file your tax returns, you cannot file your bankruptcy petition. In short, get the tax return complications out the way as soon as possible.
4) Review and Document Your Self-Employment
If you are a person who is self employed or is eligible to receive 1099 income, then your income and expenses for the previous six months must be reviewed and documented before you file for bankruptcy. We understand that this is a very time consuming procedure. However, it is absolutely essential to filing for bankruptcy, which means that you cannot skip it under any circumstances.
5) Save Your Monthly Pay Statements
When the Bankruptcy Abuse Prevention and Consumer Protection Act was passed in the year 2005, the entire bankruptcy code was revamped. This led to the creation of the Means Test. Both local and national standards for expenses are taken into account for the Means test. Under the Means Test, the 6 month average of your gross income is extrapolated into 12 months. As a result, a person filing for bankruptcy requires all 6 months of pay statements in order to pass the Means Test.
6) Discontinue the Use of Your Credit Cards
One of the silliest things that you can do prior to filing for bankruptcy is continuing the use of your credit cards. The use of credit cards needs to be stopped from the moment bankruptcy becomes a possibility. In other words, if you are struggling to make payments to your creditors, then there is no point piling on more debt through credit card usage.
7) Avoid Taking a Cash Advance on Your Credit Card
Taking a cash advance is another foolish error that people commit close to the time of filing for bankruptcy. If you take a cash advance, then the credit card company will contact you when you file for bankruptcy. If there is an adversary out there plotting your demise, then you could be falsely accused of fraud.
8) Keep Your Assets to Yourself
Transferring your possessions to a family member or friend in an attempt to reduce your wealth before bankruptcy is not permissible by law. This will further complicate your bankruptcy case. The primary goal of filing for bankruptcy should be to discharge all your current debts. Hiding assets will be deemed as an unlawful shortcut by the authorities.
9) Avoid Early Withdrawal from a Retirement Account
Many people make the mistake of borrowing a fund or withdrawing money from their retirement accounts in an attempt to pay off debts and stay financially afloat. There are plenty of negatives to such actions. Remember, bankruptcy provides exemptions to protect certain important assets, such as retirement funds. There is no need to deplete your funds ahead of time.
10) Clearly Disclose Your Income, Expenses, and Assets
The key to surviving bankruptcy with as few scars as possible is coming out clean. Make no attempts to hide your expenses, income, or assets. Disclose everything in detail in the petition. Do not expect the bankruptcy court to find your assets. You must reveal everything to them in due time. Lack of disclosure could lead to criminal charges.