Bankruptcy Cons: Here are 4 Reasons to Reconsider


For some, filing for bankruptcy will not only bring a lot of much needed relief, may actually seem like a smart financial step. Bankruptcy could clear away a lot of debt and truly provide a fresh start. However, there are situations where filing for bankruptcy can be a very bad idea. In this article I’ll discuss 4 scenarios where filing for bankruptcy can end up being more trouble than it’s worth.

1 – You have unprotected assets.

This applies specifically to a chapter 7 bankruptcy. Chapter 7 filing is a relatively short process and really packs a punch in that it will eliminate all of your unsecured debts. Debts like medical bills, credit cards, personal loans will all be completely eliminated. However, a chapter 7 is a liquidating bankruptcy. This means that if you have assets that are not protected by one of your state exemption laws, there is a chance that a bankruptcy trusty will seize the assets, sell them and give the money to your creditors. With this in mind, if you have significant non-exempt assets a chapter 7 filing could end up costing you a lot in terms of lost assets. For instance if you live in Florida and you own a boat free and clear of any loan, then there is a good chance it would be seized. Same applies for ATVs, RVs and most of their big ticket items of similar nature. Exception laws protect most of your essentials like household items, cars, wedding rings, retirement accounts, pensions or annuities. But if you happen to have something that is not protected, you may want to reconsider your decision to file a chapter 7 bankruptcy for other options where you will not lose your assets.

2 – Giving away assets.

If you’re considering filing for bankruptcy, it is best to maintain your status quo. And by this I mean not taking your name of the tittle of vehicles or transferring assets to another family member. This can cause big problems. In bankruptcy, there are laws that state that if you are giving away an asset to someone who didn’t pay you anything within a two year period of your bankruptcy filing, it is considered a fraudulent transfer weather you had a fraudulent intent or not. The reason these laws are in place is to prevent people from transferring assets out of their name, filing for bankruptcy and then transfer assets back into their name once the bankruptcy is over. In said case, the law would allow a court to undo those transfers that may have occurred within 2 years prior to your bankruptcy filing in which you may have given away an asset and didn’t receive anything in return. The most common scenarios where this occurs are many times very innocent. For example, a couple filing for bankruptcy but prior to doing so transferred the tittle of a vehicle that their 20 year old daughter has been driving since she was 16. Even though there is no “intent” to defraud your creditors, your daughter ends up getting a call from the bankruptcy trustee to turn the vehicle over.

If you’re in a similar situation, it’s best to meet with an attorney specialized in financial services before transferring your name off of any asset. It could end up saving you and the person you transferred the asset to a lot of grief and money.

3 – You recently paid back a lot of money to a family member or friend.

Now, I understand why people do this, but it can cause problems in your bankruptcy filing. The thinking goes along these lines: “I’m gonna file for bankruptcy, I owe my brother $5,000 and I don’t want him to think that I’m not gonna pay him back so I’m gonna pay him back and then file bankruptcy!” The reason why this can be a big problem is that one of the ideas underlining the bankruptcy system is that your creditors will be treated equally. And any distribution of money will result in all of your creditors getting their fair share of the money. If you paid your brother $5,000 and paid your credit cards zero, then you are clearly making exceptions for your brother over the other creditors and this is known as a “preference”. This means that if you have paid any of your run-of-the-mill creditors more than 600 dollars in the 90 days prior to your bankruptcy filing, the bankruptcy trustee can ask for that money. Further, if you’ve paid any of your family members or close friends monies back in the las 12 months before the bankruptcy is filed, the bankruptcy trustee can demand the monies be returned to the court so that it can be distributed fairly to all your creditors. Having a bankruptcy trusty contacting your brother will sure make for a very “fun” Thanksgiving, so you may want to consider postponing filing a chapter 7 at least till the year has passed after paying that debt.

4 – You have debts incurred through fraud.

Granted, this may be very rare, but if any of your debts were cause by fraudulent activities, filing bankruptcy will not be a good idea and here is why. If a creditor believes the debt you owe was incurred fraudulently, then they will have the right to come into your bankruptcy case and file a “mini-lawsuit” known as an adversarial proceeding to ask the court to determine if their debt was incurred through fraud. If the judge determines it was, then that specific debt will be deemed non dischargeable meaning that particular debt is yours to keep for life. It will not be going away in the bankruptcy.

Adversarial proceedings cannot only result in a debt not being discharged in a bankruptcy but costly as well as the legal fees for defending an adversarial proceeding are usually not including in the flat-rate bankruptcy fee that most attorneys charge. It is important to know that these types of proceedings are pretty rare and the requirements to prove fraud are not easy to comply with. Incurring debts, running into hard times and not being able to pay them back is not fraud. However, if you’re involved in a “Bernie Madoff” type scheme, bankruptcy is likely not a good option.

If you can’t file for bankruptcy then what are your options? And I get it, understanding that filing for bankruptcy may not be the solution to your specific situation is helpful, still doesn’t resolve your financial problem, but bear in mind that there are other options that can help you eliminate most if not all of your debts.

Some of these options require the completion of a payment plan over a pre-established period of time.

Most of the scenarios discussed here generally only apply to Chapter 7 bankruptcy filing with the exception of fraud wish admittedly will be an issue in any type of bankruptcy. But as I said, there are other options that could potentially allow you to keep your assets while eliminating most of your unsecured debts. You may have to make payments to your creditors over a set period of time, but in the end you’ll likely be able to eliminate most of your debt.

Another option is debts settlement. Debt settlement is where you approach your creditors and offer to pay them an amount less that what is actually owed. One of the most important takeaways from this article I can leave you with is if you’re considering bankruptcy, meet with a bankruptcy attorney early on in the decision making process. Too often people meet with an attorney after decisions have been made that will adversely impact their financial options. If you are thinking bankruptcy seems like the only option out there for you, call us first and speak to our expert advisors and let us help your guide you to a new path of financial freedom. We are here to help.