You just lost your job, you got divorced or you had a medical emergency. Your money is running out. You are in a panic. What do you do?
Most folks think Bankruptcy is the last thing they want to do. Maybe they are right. But, if you are in this situation, here are five things YOU SHOULD DEFINITELY NOT DO when financial disaster strikes.
- DO NOT WITHDRAW MONEY FROM YOUR RETIREMENT ACCOUNT TO PAY DEBTS. Virtually all retirement funds, IRAs 401Ks, pensions, etc. are protected assets when you file for bankruptcy. This means that the Court, the Trustee or your creditors can not attach that money when you file Chapter 7. So, do not touch that money to pay your debts. Leave it in the bank. In fact, not only will you be giving up your retirement nest egg, but, depending on your age, you may also incur a 20% tax penalty for early withdrawal. The worst part is that the penalty tax in not dischargeable in bankruptcy.
- DO NOT TAKE LARGE CASH WITHDRAWS FROM YOUR CREDIT CARD. Any debts incurred within 90 days prior to filing bankruptcy are not dischargeable in bankruptcy. If you take money from your credit cards to pay off some other debt, you will be replacing dischargeable debt with non-dischargeable debt. Bad idea. Furthermore, any payment of more than $600 to any one creditor within 6 months of filing bankruptcy may be deemed a preferential transfer and disallowed by the Court. Paying off old debt with new debt is never a good idea. Talk to a bankruptcy attorney before you make any financial moves.
- DO NOT EMPLOY DEBIT CONSOLIDATORS. In most cases, credit consolidators do not work well for debtors. These companies charge a lot of money, most of it up front. The do not get creditors to reduce the amount owed. They merely get banks to give you more time to pay. Most of the clients end up filing bankruptcy, after depleting their life savings. These deals only work for debtors with high incomes, who have the ability to make large lump sum payments to creditors. If a debtor is already having difficulty meeting current expenses, a debt consolidator is not a viable solution.
- DO NOT TAKE OUT A SECOND MORTGAGE. Obtaining a mortgage today is difficult, especially for individuals with credit scores below 660. However, even if a debtor may qualify for a second mortgage, adding more debt may not be the best solution. A debtor must take a long, hard look at their household budget, current monthly expenses, as compared to monthly income. Taking out a second mortgage may merely add to one’s expenses and push one further in debt. Discuss your options with a financial adviser or a bankruptcy attorney before making this move.
- DO NOT BORROW MONEY FROM FRIENDS OR RELATIVES. When you file bankruptcy, you have to provide the Trustee with three to six months of bank statements. If you take a loan from a family member and deposit those funds in your bank account, the deposit will be a red flag to the Trustee. These funds may not be exempt from Bankruptcy. You will also be obligated to report this loan on your petition. Repayments to relatives of over $600 could also be deemed a preference transfer and disallowed by the Trustee.
Before you make any of these transfers, consult a Bankruptcy attorney for guidance. An ounce of prevention can be worth more than a pound of cure.