What Should I Avoid Before Filing Bankruptcy in Virginia?

If you are considering bankruptcy, one of the most important things you can do is avoid making major financial moves before speaking with a bankruptcy attorney.

People sometimes assume they should clean up their finances before filing—pay back a family member, move property out of their name, cash out a retirement account, sell a vehicle, or use available credit while they still can. Unfortunately, those decisions can sometimes create problems that would not otherwise have existed.

In many cases, the best approach is surprisingly simple: do not try to rearrange your financial life before you understand how bankruptcy will affect it.

Here are some of the most common things we tell prospective clients to be careful about.

1. Don’t Transfer Property to Friends or Family

Transferring a car, house, money, or other property to someone else shortly before bankruptcy is usually a bad idea.

Bankruptcy requires disclosure of property transfers made before filing, and a bankruptcy trustee may be able to undo certain transfers. A transfer can be problematic even when there was no dishonest intent. For example, giving a vehicle to a child or transferring property to a spouse for little or no payment can raise issues if creditors could otherwise have reached that property.

Trying to remove your name from an asset before bankruptcy may create a much bigger problem than simply disclosing the asset and determining whether it can be protected.

2. Don’t Pay Back Family Members Before Other Creditors

Many people understandably want to repay their parents, children, siblings, or friends before filing bankruptcy.

Bankruptcy law, however, does not necessarily treat those payments the same way you do.

Payments to relatives and other insiders before bankruptcy must be disclosed, and certain payments can potentially be recovered by a bankruptcy trustee. That can put the person you were trying to protect in the uncomfortable position of receiving a demand from the trustee.

If you owe money to a family member, tell your bankruptcy attorney about the debt before making a large repayment.

3. Don’t Cash Out a Retirement Account Just to Pay Credit Cards

This is one of the most frustrating situations we see.

Someone is struggling with credit cards or personal loans, so they withdraw money from a 401(k), IRA, or other retirement account in an attempt to keep everything current. Several months later, the debt is still overwhelming and they end up considering bankruptcy anyway.

Many qualifying retirement accounts receive significant protection from creditors and in bankruptcy. Once money is withdrawn, however, that protection can change depending on what happens to the funds.

You may also create taxes or penalties from the withdrawal.

Before using retirement savings to pay debts that might otherwise be addressed through bankruptcy, it is worth finding out what your bankruptcy options actually are.

4. Don’t Run Up Credit Cards or Take Large Cash Advances

Using a credit card shortly before bankruptcy does not automatically mean the debt cannot be discharged. But unusual spending immediately before filing can create problems.

Bankruptcy law specifically provides heightened scrutiny for certain luxury purchases and cash advances made shortly before a case is filed. More generally, a creditor may challenge a debt if it believes money was borrowed without an intention to repay it.

Normal living expenses are different from going on a shopping spree because you expect to file bankruptcy.

If bankruptcy has become a serious possibility, taking large cash advances or making significant unnecessary purchases on credit is something to avoid.

5. Don’t Sell Property for Less Than It Is Worth

Selling an asset before bankruptcy is not necessarily prohibited. The problem is usually what was sold, what it was worth, what you received, and what happened to the money.

For example, selling a $15,000 vehicle to a relative for $2,000 is very different from selling it for its fair market value in an ordinary transaction.

Bankruptcy trustees can examine transfers in which a debtor received less than reasonably equivalent value. A transaction that seemed informal or harmless at the time can therefore become an issue after filing.

If you need to sell a vehicle, real estate, business interest, or other significant asset while considering bankruptcy, talk with an attorney first.

6. Don’t Leave Assets Off Your Bankruptcy Papers

One of the biggest misconceptions about bankruptcy is that an asset only needs to be disclosed if you think the trustee can take it.

That is not how the process works.

Bankruptcy requires disclosure first. Exemptions and other protections determine what happens to the property afterward.

Assets can include obvious things such as houses, vehicles and bank accounts, but also things people sometimes forget about, including:

• anticipated tax refunds;
• claims from automobile accidents or other lawsuits;
• money someone owes you;
• business ownership interests;
• valuable collections or equipment;
• inherited property;
• cryptocurrency and investment accounts; and
• property being held by someone else.

An asset may be completely protected and still need to be disclosed.

It is much easier for your attorney to deal with an asset that was properly disclosed than to explain later why it was omitted.

7. Don’t Move Money Around Simply Because You Are Filing

Prospective clients sometimes start closing accounts, moving money between banks, adding relatives to accounts, removing their names from accounts, or putting funds into someone else’s account because they believe that will make the bankruptcy easier.

Usually, it does the opposite.

Financial transactions before bankruptcy have to be explained, and unnecessary transfers can make an otherwise straightforward case more complicated.

There may be legitimate reasons to change where money is kept—for example, concerns about a bank’s right of setoff—but that is something to discuss with your attorney based on your particular situation.

8. Don’t Assume You Should Stop Paying Everything

Bankruptcy may eliminate or restructure many debts, but not every payment should automatically stop.

If you intend to keep a house or vehicle, for example, continuing payments may be important. Taxes, child support, alimony, utilities, insurance, and other obligations can also require different treatment from ordinary credit-card debt.

Chapter 13 adds another layer because arrearages and secured debts can often be handled through the repayment plan.

Before deciding which bills to stop paying, determine what you are trying to accomplish in the bankruptcy case.

9. Don’t Wait Until the Last Possible Moment

Bankruptcy can often stop collection activity quickly, but waiting until the day before a foreclosure, repossession, garnishment hearing, eviction, or other deadline limits the options available.

It also leaves very little time to investigate issues such as property transfers, recent payments, income eligibility, exemptions, tax returns, or prior bankruptcy cases.

If you believe bankruptcy may be necessary, an early consultation does not commit you to filing. It simply gives you the opportunity to understand your options before circumstances force a decision.

The Most Important Rule: Ask Before You Act

A large part of good bankruptcy planning is knowing when not to do something.

We regularly meet people who are worried about an issue that can be handled fairly easily in bankruptcy—and other people who unintentionally created a more complicated problem by moving money, transferring an asset, repaying a relative, or draining protected retirement savings before they sought advice.

If you are considering Chapter 7 or Chapter 13 bankruptcy in Virginia, you do not need to reorganize your finances before meeting with an attorney. Bring the situation to us as it actually exists.

At Kane & Papa, P.C., we help individuals and families throughout the Richmond area understand their bankruptcy options and plan the timing of a case before filing. Contact our office to schedule a consultation and discuss what you should—and should not—do next.

This article provides general information about bankruptcy law and is not legal advice for any particular situation.