The Top 9 Mistakes To Avoid When Considering Filing For Bankruptcy

2014-12-01

Bankruptcy

When your financial situation gets too complicated for you to resolve on your own, you may be considering various debt relief solutions. If you are thinking about filing for bankruptcy, there are certain matters to consider and common mistakes to avoid.

One of the legislated purpose of Bankruptcy & Insolvency Act (BIA) is to permit an honest but unfortunate debtor to be discharged from their debts, subject to reasonable conditions. Following are some matters to consider:

Do not forget to provide complete and accurate information about all of your assets, debts, income, expenses and financial history. You do so under penalty of perjury. If you knowingly misrepresent your information, such as failure to disclose an asset, you could be subject to criminal prosecution, or the Trustee may seize that property.

Do not leave a creditor out from your bankruptcy. Every debt that is in your individual name or is a joint debt must be included in your bankruptcy filing.

Do not fail to file income tax returns before bankruptcy. Your tax returns are crucial to determining your current and past earnings and asset holdings, as well as satisfying potential priority tax claims.

Do not rack up new debt before the bankruptcy. If you incur more debt in the 60 to 90 days prior to filing bankruptcy, then the creditors may try to object to your discharge. They may argue that you took out the loan without any intention of paying it back and that you should not be allowed to discharge that debt in bankruptcy. This also holds true for credit card cash advances and credit card purchases.

Do not cash out your RRSPs, pension or other retirement payment plan, as you could lose the exemption status these plans hold.

Avoid taking out an equity line of credit against your house. If you do, this may become an issue in your bankruptcy. You may well have to explain the purpose and intent of taking out such equity and what you did with the proceeds you received.

Do not transfer or move assets from your name to another. When you are asked to provide information on assets that you own (or will own) at the time of filing bankruptcy, do not be tempted to sell, transfer for safekeeping or hide assets before filing bankruptcy. If you do, you might be denied a discharge and even be subject to criminal penalties. Of course, you may have sold property in an effort to pay off your debts on your own. This is not necessary criminal or even wrong on your part. The Trustee will ask if you sold, transferred or gave away any assets, usually between a period of one year and five years before filing bankruptcy. The Trustee will also ask what you did with the money. If you paid a creditor shortly before filing, then the Trustee may seek to get that money back as a preferential transfer.

Do not selectively repay loans. If you pay back loans to friends or relatives (within one year of filing) or even other creditors (within 90 days), then this may be considered a ‘preferential transfer.’ The bankruptcy Trustee may file an adversarial proceeding to get the money back from the person or entity you paid and then disburse the money in equal shares amongst all of your creditors.

Do not ignore impending collection actions. If you intend to file bankruptcy, your creditors likely don't know that so they may obtain a judgment against you, garnish your wages, repossess your car or foreclose on your house. While in most cases a creditor would have to return property it inadvertently seized after a bankruptcy was filed, it can create a costly legal headache, which you should avoid if at all possible. Time is of the essence in such situations.

If you think you might be on the verge of receiving an inheritance within a year, a significant income tax refund, a settlement from a lawsuit or repayment from a loan you made to someone else, you should reconsider filing bankruptcy. You could use this influx of money to settle with creditors and get out of debt on your own (i.e. informal proposal) or you may want to consider making an offer to your creditors to pay a certain percentage of debts by way of a Consumer Proposal through the Trustee.