6 Mistakes to Avoid when Filing for Bankruptcy


Most people seeking to file a bankruptcy case is dealing with completely foreign territory and what can be a complex process.

Many mistakes can hurt a person’s case. These are some common mistakes that should be avoided when filing a bankruptcy case.

1. Not Considering Bankruptcy as a Way to Relieve Debt

The idea of bankruptcy can be scary and intimidating to many people. For this reason, many potential filers will not consider bankruptcy as a viable means of getting out of a bad financial situation.

However, many times it is the best, if not only, option available. Individuals will put it off for too long, actually making their financial situations much worse than it already is.

It helps to consult with a bankruptcy attorney to discuss the specific circumstances and get advice on what is the best option for the specific debtor. Keep an open mind when meeting with the attorney, and truly consider bankruptcy as an option.

2. Delaying Bankruptcy Too Long

One of the more common mistakes filers make is waiting too long to file bankruptcy. Many times, waiting too long can make it too late for that person to protect a certain asset, such as a home, if foreclosure is already in process.

Also, if a collection is in process and ends in a judgment resulting in wage garnishment, that judgment is then bankruptcy-proof and not allowable for discharge.

Therefore, if the filer does not act quickly enough, he or she could end up losing an asset that the filer would have otherwise had protected in the bankruptcy.

3. Using a Home Equity Loan to Pay Off Debt

Another common mistake involves use of home equity loans to pay off unsecured debt. This option is not ideal, especially in situations where the homeowner is not able to continue making payments on the home equity loan and ends up losing his or her home.

Home equity loans should never be used to pay off large credit card balances. An unsecured debt that could otherwise be discharged in bankruptcy now becomes a secured debt that could end up putting that person’s home at risk.

4. Paying Debt with Retirement Account Funds

It is an ill-advised idea to use 401(k) or IRA or other retirement monies to pay off debt due to the tax consequences that come along with early withdrawal of this money out of these accounts. Retirement accounts are tax deferred, meaning the money does not get taxed until it comes out, which is ideally at retirement age when the individual is in a lower tax bracket.

These accounts are also protected under exemption laws in bankruptcy cases so there should be no concern that this money would be depleted.

In the end, the higher tax penalties the individual will have to face from taking this money out is simply not worth it after the case is done and all debts discharged.

5. Not Listing All Creditors

It is of extreme importance that the filer be completely honest in all bankruptcy filings, including disclosing all debts and assets.

It is important that all known creditors be listed, no matter how much the debt is and no matter whether the person intends to repay the debt. Similarly, debts with co-signers should also be listed.

Not being honest and intentionally or even unintentionally leaving a creditor out can result in the discharge later being denied.

6. Hiding Assets or Debts

Many individuals who are considering bankruptcy live under the false idea that they can sell or transfer assets in an effort to keep them from being reached by creditors.

Transferring assets to keep them from being reached by the bankruptcy trustee is fraudulent and could result in the case being dismissed. In fact, the court will look back two years prior to bankruptcy to see if any transfers or sales were made to hide specific assets.

In addition, paying back personal or family debts is a bad idea if done shortly before filing for bankruptcy. The filer will need to list his or her debts, and if it is shown that these personal debts received preference over other valid creditors, the debtor may be rejected for discharge and may also have to repay the preference between debts.

When in doubt, speak with a bankruptcy attorney regarding debts.


An experienced Texas bankruptcy lawyer can help you with any questions you may have about how the bankruptcy process can help you manage your debt. Please call the Law Office of Marilyn D. Garner at (817) 505-1499 for a free strategy session to discuss how bankruptcy may help you.

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