Common Mistakes

Bankruptcy Mistakes to Avoid

Not seeking a lawyer’s advice soon enough

This is a case of what you do not know will hurt you. Options that might preserve your assets for your future use after a bankruptcy might be lost if the right steps are not taken soon enough. If you are having financial problems, get in to see a skilled bankruptcy attorney as early as possible. The more time that the attorney has to assess your situation, the more options you will likely have to get the best result.
Transferring assets to relatives or friends

Transferring assets to relatives or friends without adequate consideration is usually deemed fraudulent by the Bankruptcy Court. The transfer is usually reversed, and is, therefore, ineffective. If the property was exempt, you will lose the exemption when the trustee reverses the transfer. Worst of all, the transfer may become a basis by which the Court will deny a future bankruptcy discharge of debts altogether. This is the worst of all possible worlds. You lose the asset, you lose the exemption if one was available, and you are not eligible for bankruptcy relief. If you have made transfers of money or property, it may be possible to put you in a position where you could still get a discharge, but you should see a skilled bankruptcy attorney immediately to evaluate the options to undo or minimize the harm of an improper transfer.

Playing credit card roulette

This is the process where a person takes cash advances or balance transfers on one credit card to pay the amounts owed on other credit cards. Not only is this a sign of desperation, but the amounts that you obtain as cash advances might not be dischargeable in a future bankruptcy. If you are in this situation, you are probably making your situation worse instead of better. You should stop immediately and seek the advice of an attorney.

Taking money out of retirement accounts to pay bills

Most retirement accounts are exempt from seizure in a bankruptcy or by creditors. Generally, most debts that people pay when they take money from their retirement accounts would be discharged in a bankruptcy and would not have to be paid. Usually, the best course is to save your retirement account for its intended purpose – retirement. You may even incur tax penalties for taking money out of retirement accounts prematurely. Do not take money out of your retirement account to pay bills without having a lawyer help you analyze your overall financial position. If you have drawn money out of your retirement account recently, you should call for an appointment with an attorney at Vanden Bos & Chapman, LLP as soon as possible to evaluate the consequences and to explore your options, if any, to mitigate the adverse consequences.

Paying back loans to friends or relatives

While you may think that repaying your friends or relatives is morally the right thing to do, a bankruptcy trustee will likely be able to reverse the transfer and take the money back from the intended recipient because the payment will be considered a preferential transfer if made within certain time periods prior to the bankruptcy. Making payments to creditors in advance of bankruptcy requires careful planning after receiving advice from a bankruptcy lawyer. If you have funds available to pay some, but not all, of your creditors, you should not repay any debts without first seeking advice from a competent bankruptcy lawyer.

Refinancing your house or taking a second mortgage on your house to pay bills

A significant amount of the equity in your house is exempt from the claims of creditors because of the homestead exemption in a bankruptcy. By taking the equity out of your house to pay bills, you are converting an exempt asset (your equity – which you may get to keep) and using it to pay bills that you could probably discharge in the bankruptcy without payment. Often, we see clients drain all of the equity in their homes and still end up filing bankruptcy. Instead of getting a fresh start with a home in which they have significant equity when they ultimately have to file bankruptcy, the client ends up with a home with no equity that they may lose after the bankruptcy because they cannot afford the higher monthly payments. You should not refinance your house or take a second mortgage to pay bills without first having a lawyer help you analyze your entire financial situation.

Not paying employee withholding taxes

If you are in business, do not make the mistake of failing to remit your employee withholding taxes to the IRS and the Oregon Department of Revenue. The IRS and the Oregon Department of Revenue have the power to assess certain individuals responsible for managing a company for any employee withholding taxes that are not paid by the company. Employee withholding taxes are not dischargeable in any type of bankruptcy. Lack of money to pay employee withholding taxes is usually a symptom of a greater economic problem in a business. If you are struggling to pay your employee withholding taxes when due, you need to consult with an attorney as soon as possible to determine your best course of action.
Loaning money to your business without properly documenting the loan and without taking a security interest for repayment of the loan

It is always a difficult decision whether to loan personal funds to your own business. However, if the decision is made to make the loan, it is virtually always prudent to properly document the loan, including taking a security interest to secure repayment of the loan. Private individuals should never loan money to their own corporation or business without the assistance of an attorney to make sure the documentation is proper. This will put you in the best position for repayment of your loan if the business later becomes insolvent. If the documentation is inadequate, a bankruptcy trustee may not have to pay the loan and might be able to take the intended collateral without payment to you.
Failing to live within your means

Circumstances in life change quickly. Jobs may be lost. Income may decline significantly. If you have a change in your job status or the income that you receive, you may believe that things will quickly return to normal. Often that is not the case. You need to be prepared to adjust your expenses to conform to your income levels if there is a change. If you continue to spend at the same level as your prior income, you may dig a hole so deep that you cannot get out.

Foreclosure Mistakes to Avoid

Failing to see a lawyer immediately

Foreclosure is often a symptom of greater financial problems. Before your situation deteriorates further, and before you take actions that may hurt you instead of help you, a person facing foreclosure should seek the advice of an experienced attorney to determine what the best options are and what mistakes to avoid. The bankruptcy code contains a trap for the unwary. No person is eligible to file bankruptcy unless that person has first attended a credit counseling session and obtained a certificate of completion within 180 days prior to the bankruptcy petition date. It may take 5 days or more to get such an appointment. If you procrastinate, you may not be able to use bankruptcy to stop your sale because you might not be able to get your counseling certificate in time. Do not delay - get your certificate at least 60 days prior to your scheduled foreclosure sale so you are eligible to file bankruptcy if you have to.

Taking a second mortgage on your house to cure the amount owed on the first mortgage

Second mortgages are expensive. Usually, there are points charged, fees, closing costs, and a higher interest rate. The equity in the house that existed before the second mortgage may be lost when a second mortgage is obtained. There may be better alternatives than a second mortgage for dealing with the foreclosure. An attorney at Vanden Bos & Chapman, LLP can explain those alternatives to you.

Giving up

Some people feel so overwhelmed by foreclosure process that they give up and let the foreclosure run its course, thereby losing their house. Do not give up without being informed of your options. An attorney at Vanden Bos & Chapman, LLP can review a variety of alternative courses of action for a person facing foreclosure. Some of those may work for you. You owe it to yourself and your family to take any reasonable steps that may help you preserve the house and your equity in the house.

Setting the price of the home too high when selling it

If you are in foreclosure, you do not have much time. Sometimes the sale of your house is your best option for dealing with the foreclosure. The fact that you are in foreclosure usually depresses the price that you might otherwise receive for your house. An aggressive price needs to be picked considering the limited time available to sell. You should listen to a competent real estate agent and make sure that the agent understands the limited amount of time to sell the house so the house is priced and marketed aggressively.

Refusing to consider bankruptcy as an option to prevent loss of the house

Understandably, many people never contemplated the possibility of filing bankruptcy. Similarly, many people initially consider the prospect of filing bankruptcy to be distasteful. However, a Chapter 13 bankruptcy may be the best method for keeping your house and catching up on your payments or getting enough time to sell your house for its fair value. It is usually better to file a Chapter 13 sooner rather than later. An attorney at Vanden Bos & Chapman, LLP can fully explain how a Chapter 13 would work in your particular circumstances. Do not deprive yourself of access to information that may help you. You should call for an appointment as soon as possible. Our number is (503) 664-3134. Of course, having an appointment is confidential and does not obligate you to any particular course of action or to file a bankruptcy.

Failing to set aside money to catch up on past due house payments

Once a foreclosure starts, the lender typically will not accept your monthly house payments. As each month passes, the amount of the arrears gets larger and larger. Unfortunately, most people spend the money that they would otherwise send to the lender for the monthly house payment. It is better to set aside that money in a separate bank account as a reserve so you can use it later in a Chapter 13 process to get caught up on the house payments.

Delay - procrastination

The simple fact is that most persons facing foreclosure have never been in foreclosure before and never dreamed that they would be in foreclosure. It is often difficult to admit to yourself the seriousness of the problem. Instead of taking action to deal with the problem, people often delay until it is too late and options are lost. Do not rationalize that a foreclosure is not serious or that you will be able to make it go away. You need to see an attorney as soon as you know that you might be foreclosed to make the appropriate plans to deal with it.

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