Filing Bankruptcy – The Smart Move?

Riffing off Steve Rohde on the Huffington Post

on Filing Bankruptcy – The Smart Move?

Detroit Bankruptcy 341 Hearing Room
Detroit Bankruptcy 341 Hearing Room

Of course, it depends on your situation.

Bankruptcy is not a moral decision. It is a legal choice made when the debt situation is hopeless. I am certainly not recommending bankruptcy as a casual solution and I’ve seen very few people who use it that way. In fact the percentage of people who file bankruptcy more than once is very small, that is unless you are a Donald Trump enterprise. They’ve filed four times.

Let me pick apart a few of his bankruptcy points that are, well, wrong.

Preferential Transfers

1. Don’t Pay Creditors
Avoid making any large or unusual payments. This can seem counterintuitive, but is an important point. It may seem like you should pay creditors if you are able, but it can cause problems later on. This is not to say you shouldn’t make routine payments or pay bills. You should still pay your monthly credit card bill, if you can, and your electric bill and so forth. However, large payments to single creditors, or paying off a whole debt, can cause problems after you file. These are called ‘preferential transfers,’ meaning that one creditor has benefited unfairly over others. This is particularly true if the debt you pay off is to a relative or friend. These creditors can be sued later by the court, and have the money taken away.

Mostly correct.

A chapter 7 bankruptcy trustee can bring a lawsuit, adversary proceeding, against a creditor that received a preferential payment.  But, that is not your problem, unless you made a payment on a debt to or for a friend or relative.

Why would you still pay your monthly credit card bill?  This makes no sense.

If you need to file bankruptcy, stop paying the credit cards right away.  You do not get that money back.

Consult an attorney first, but some folks pay the credit cards because they can, when they do not have enough for the house or car or tax payment that is more important.

Don’t Drain Retirement Funds

This one I double down on.  It brings tears to my eyes when clients have borrowed all they can from 401k accounts, and/or pulled out IRA money, which creditors cannot get, to pay debt that can be discharged in bankruptcy.

There is more to this, so I will pick it up next week.


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