The Most Common Mistakes in Filing for Bankruptcy

• The federal bankruptcy system exists to protect both debtors and creditors. It protects debtors by providing an orderly structure to discharge debts when the attempt to repay becomes hopeless. Via a number of exemptions, bankruptcy allows the debtor to retain some assets, such as a home, in some circumstances. Bankruptcy law protects creditors by providing structures to prevent the fraudulent transfer or concealing of assets otherwise available to satisfy legitimate debts. However, the bankruptcy process is complex, and debtors often make similar mistakes as they navigate it.

Filing Without an Attorney

• Bankruptcy law is complex, with numerous exemptions and exceptions based on state law. An attorney can help you deploy your assets to take maximum advantage of the protections granted under the law. She can also provide valuable guidance as to which debts are not dischargeable via bankruptcy.

Disregarding Long-Term Career Effects

• If your job requires you to possess sensitive information or handle cash, or it requires a security clearance, a bankruptcy on your record may cause you to have a hard time qualifying for work in the future. In some cases, it can cost you your job.

Running Up Debts Before Bankruptcy

• Some people max out their credit cards or take cash advances or take out new loans immediately prior to filing bankruptcy. However, some debts incurred within 90 days of filing bankruptcy are not dischargeable under the law.

Transferring Property

• Generally, you cannot make paper transfers of property out of your name to protect the asset from bankruptcy. If you do so, the court may rule the transfer a "fraudulent conveyance." Generally, you must receive fair value in compensation for any transfers out of your name for one full year prior to filing for bankruptcy.

Filing When the Government Owes You a Tax Refund

• If you file just before receiving a large tax refund, the bankruptcy trustee may be able to attach the refund to satisfy creditors. If you put off filing until after you receive the refund, you can keep the refund cash for your own use.

Liquidating Retirement Accounts

• Retirement accounts such as 401k plans, 403b plans and IRAs receive substantial protection under bankruptcy law, as do annuities, cash value life insurance and home equity in many states. Do not liquidate retirement accounts to pay off debts when bankruptcy is imminent anyway.