There are 3 questions to ask if you’re thinking about filing a bankruptcy case.
Preferential Payments and Transfers
First, is your case going to be approved by the Court? As an attorney, I want to know if clients have engaged in any questionable practices in the recent past. Specifically, have they sold or transferred any assets to “insiders” (definition: family members, friends or business associates) in the past 4 years? If the assets were sold for fair market value, then there is no problem, but if they were given away, I’ll want to know about it. Has the client repaid any loans to any insiders in the past 4 years? Example: let’s say that you owe $25,000 in credit card debt and you also owe $10,000 to your mother. In the past 2 years, you’ve been faithfully repaying Mom $400 a month, but haven’t paid anything to the other creditors. Then the Bankruptcy Trustee assigned to your case could force Mom to repay all the money you’ve given her over the past 2 years. By the way, these payments are called “preferences” under bankruptcy laws.
Mind you, there is nothing fraudulent about making these preferential payments. You do however have to disclose to the Court when asked if you’ve transferred assets or repay insiders. If you fail to respond truthfully, then yes, then you appear to have committed fraud.
Another scenario to examine is to look at what the goals are when you’re filing bankruptcy. In a Chapter 13 case, is your goal to save your home and catch up on your mortgage arrears? If so, then is your payment plan realistic? The Court and the Trustee will be generous with you at first, but if you repeatedly fail to make payments, then you’re wasting everyone’s time, including your own. So, it’s best to look at everything with honesty and look at what your overall goals are.
At my first meeting with prospective clients, I want to ask these specific questions about their past financial practices. And I focus on any recent sale of assets and any preferences.
Keeping All of Your Property
Second, will you be able to retain all of your property if you file a bankruptcy case? My goal is to eliminate any and all surprises from the bankruptcy process. I review all of your assets and help you come up with valuations on their worth. Pennsylvania has pretty good laws (called “exemption” laws) in Bankruptcy Court, so most clients can protect all that they own, and never have problems. But this is something to look into at the very beginning, which starts at the first consultation.
Bankruptcy Usually Improves Credit Scores
Third, how will bankruptcy affect your credit? In most cases, with clients having impaired credit ratings already, a bankruptcy filing will dramatically improve their credit scores. If your credit scores are hovering around 500, then bankruptcy will remove all of the adverse credit references. Many clients with 500 credit scores find that within just a few months, their scores have risen up 75 or 100 points. At that point, you may want to work on further rebuilding your rating after the bankruptcy is over.
These are the 3 basic questions to consider when you’re looking into bankruptcy.