Often, when faced with financial difficulty, an individual may decide to take a number of faulty steps to try and fix their finances. However, these choices may make the situation worse, and if it becomes clear that bankruptcy is the better option, these decisions may affect the success of a future Chapter 7 or Chapter 13 filing. As such, it is crucial that you weigh your options carefully before taking any action. The best way to do this is to speak with an expert regarding your situation. Contact Winterbotham Parham Teeple, a PC so we can assist you.
Avoid incurring additional debt.
Many times, the first instinct is to get a personal loan or consolidation loan to help manage out-of-control debt, however, this just transfers your debt load from one lender to another. The debt will still be owed and must still be paid. Oftentimes, once the debt is consolidated, the person is forced to charge up the recently paid-off credit cards to maintain their living expenses because the personal loan payment is still too much of a strain. Now you have credit card debt and personal loan debt without any long-term, beneficial results. To further complicate things, if you then realize that bankruptcy was the better decision, the recent debts may become a problem. When you immediately incur new debt or make large purchases with your credit cards right before filing, the lenders could file a complaint asking about these debts to survive your bankruptcy filing. Any debt incurred within 90 days of your bankruptcy case can be argued as non-dischargeable, so incurring these debts only to file for bankruptcy anyway may cause the debts to survive or a delay in your ability to file. If you are considering a consolidation loan or personal loan to pay off your debt, speak to a bankruptcy attorney beforehand so they can review your finances. You may realize that incurring additional debt may be more harmful than helpful.
Be wary of taking out a mortgage on your home.
There is a general misnomer about bankruptcy filing that a person’s home will not be protected. That is very often not the case. When you file for bankruptcy, you have an obligation to list your assets and protect those assets up to the maximum amount you are allowed using California exemptions. In the majority of cases, a home is fully protected, meaning you can seek the relief you need from your creditors and maintain the equity in your home. Taking out a mortgage or a home equity line of credit (HELOC) places a financial burden on your primary residence and may not be the best decision if you are considering using your equity to pay off your debt. Once a loan is recorded against your home, it must be paid. If you have a balloon payment, adjustable interest, job loss, or other change of financial circumstances in the future, your ability to continue to pay that mortgage may be at risk. Failure to pay a mortgage can lead to foreclosure, a much worse position to be in than struggling with unsecured credit cards or loans. Don’t decide to incumber your home because you feel like it is your only option. Even if your home cannot be fully protected in bankruptcy, a Chapter 13 bankruptcy filing may be a better route to financial health.
Keep your retirement plans
In a California bankruptcy case, your retirement plans, such as 401ks and IRAs, are fully protected. The last thing you want to do is steal financial security from your future self. Retirement cash out may seem like a good idea, but draining your retirement account may affect your ability to retire in the future and will affect your future cash flow when you need it most. Paying off your debt with your retirement is not the best idea, especially when that money is typically fully protectable. Instead, discuss your finances with a qualified attorney to determine if you can walk away from your debt in a Chapter 7 bankruptcy filing and still preserve your future retirement income. Call Winterbotham Parham Teeple, a PC at 800.400.9000 right now for more information.
Do not repay personal loans prior to filing for bankruptcy.
Even if you already know that bankruptcy is the best decision for your financial future, be careful what you do in preparation for filing. When things get tough, many people borrow money from friends, family, and business partners. As things worsen, it’s common for debtors to want to pay off these types of loans before declaring bankruptcy. Understandably, most people are wary of ‘burning’ friends and family who have helped them out when times are tough. However, the court wants you to treat your lenders (including friends, family, and business partners) equally. Any preferential payments to what the court deems an insider is a fraudulent transfer. The court can demand that money be turned over and used to pay all your creditors equally. Paying off friends and family before filing is never a good decision, so it is always best to discuss this consideration with your bankruptcy lawyer before you act.
The decisions you make for your financial health should not be made on the spur of the moment. Even if you are not convinced that bankruptcy is the best course of action, it is always best to consult with an attorney to weigh your options. That way, you can be confident in your decision and be certain that you are not making choices that may harm you in the long run. At Winterbotham Parham Teeple, a PC, we can provide a free evaluation during which we will inform you of your options and the best course of action.