Pre-bankruptcy planning plays an important role when individual debtors are involved in bankruptcy cases. The aim is usually to devise a strategy and create an environment that increases the possibility of the bankruptcy’s success. Typically, this involves efforts to maximize exemptions. However, if handled incorrectly, it can jeopardize a debtor’s exemption claims and even the right to discharge.
Since going through bankruptcy – either Chapter 7 or Chapter 13 – can be a complicated and daunting process, it is usually in a debtor’s best interest to seek legal advice as early as a possible. This way, your attorney can guide you through the pre- bankruptcy stage as well.
Examining Your Finances
Your attorney will start by going through your finances to determine if you might be better off by filing for Chapter 7 or Chapter 13. If you plan to file for Chapter 13 in the near future, you might consider using the money you have to repay debt that will not be discharged through the bankruptcy. For instance, you may divert your credit card payments toward your mortgage or car loan. However, you need to be sure that you’re filing for bankruptcy before you stop making any such payments.
What About Your Assets?
Reviewing your assets at this stage is important. While you need to determine which assets are exempt and which are not, you also need to decide if you’re okay with what you might be able to keep and what you might have to forego. This can include your car and even your home.
If you have already repaid a large percentage of your mortgage and built equity in your home that exceeds the exemption amount, you might consider taking a non-bankruptcy route to get the required debt relief. This may include settling some of your debt and paying the rest through specially created repayment plans.
Providing Accurate Information
The pre-bankruptcy planning stage gives you adequate time to collate all your financial information as accurately as possible. You need to act in good faith right through your bankruptcy proceedings, and providing falsified information or trying to hide relevant facts is never a good idea. Keep all your tax returns close at hand as they might be required to assess your income. This, in turn, will help determine if you are eligible to file for bankruptcy.
What You Should Not Do
While you might be inclined to follow paths that might seem advantageous during the course of your bankruptcy proceedings, there are some actions you should steer clear of at all costs.
Trying to Hide Assets
As tempting as it might seem to transfer your assets such as your home, car, or certificates of deposits to your family members with the aim of hiding them from the trustee overseeing your case, it is never a good idea. Not only can your case get thrown out of court, you might even face criminal charges and have to spend time in prison.
Borrowing Against Your Home
Borrowing money against your home to repay your credit card debt or personal loans is not a good idea because you’re essentially converting your unsecured debt into secured debt. If you are unable to make timely repayments toward your home equity line of credit (HELOC), you could end up losing your home. From the bankruptcy point of view, according to the revised homestead exemption in California, you may claim up to $600,000 in your home as exempt depending on the county in which you live and you home’s median sale price.
Incurring New Debt
Don’t think about using unsecured credit to make large value purchases just before filing for bankruptcy assuming that these debts will be discharged. Expect your judge to scrutinize all your debt closely to determine which can and cannot be discharged.
Withdrawing From Your Retirement Plan, 401 (k,) or IRA
In California, the money you have in your retirement plan can be completely exempted from your bankruptcy. As a result, do not consider withdrawing money from your retirement plan, 401 (k,) or IRA to repay existing debt until you discuss your case with an attorney.
Conclusion
Pre-bankruptcy planning can make all the difference in your how bankruptcy case eventually pans out, which is why you should contact a bankruptcy attorney at the earliest. Your attorney can then help you make the most of existing California bankruptcy exceptions in a completely legitimate manner.