Most retirement funds are fully protected from creditors and the bankruptcy court. That means if you file bankruptcy, you generally get to keep the money in your retirement accounts. Congress wants you to have money for your retirement.
Liquidating retirement funds is big mistake. First, you may no longer be able to protect those funds once they are converted into cash. Second, money you used to pay on a loan may be recoverable by the bankruptcy trustee. Money paid to creditors before bankruptcy does not usually improve your financial situation or help your credit. Always discuss liquidating retirement funds with an attorney first.
Mistake #2: Transferring Property for Less Than Fair Market Value
When someone transfers property for less than its full value, the transfer raises red flags. This is especially true when the transfer occurs just before a bankruptcy filing. The bankruptcy trustee scrutinizes all property transfers before bankruptcy, and if a property transfer was not a fair and honest exchange, the trustee may avoid the transfer and get the property back.
A common bankruptcy mistake is transferring property to a friend or family member in an effort to hide it from the bankruptcy court. This may result in: (1) losing the property anyway to the bankruptcy trustee; (2) denial of your bankruptcy discharge; and/or (3) criminal prosecution for bankruptcy fraud.
Mistake #3: Paying Off Loans
When a loan is paid off just before bankruptcy, this attracts the attention of the trustee. First, if you paid a large sum of money to one creditor just before filing, the trustee may ask the creditor to return the money. Second, paying off an unsecured creditor that is otherwise dischargeable (like a credit card or payday loan) is like throwing your money away. You need that money to help rebuild your finances.
Finally, paying off a secured debt could create too much non-exempt equity in the asset. When you pay off secured loans, you increase your equity in the property that was the collateral for the loan. The available equity may now exceed the amount you are allowed to protect. The bankruptcy trustee may then ask you for the property or the cash difference between the equity and the exemption amount.
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