Wednesday, July 06, 2005

Preparing for Bankruptcy

If you are planning to file for bankruptcy, there are two important rules to remember. Both rules deal with treatment of creditors in the 3 months leading up to the filing of the bankruptcy.

Credit Card Purchases

If at all possible, I strongly recommend that you do NOT use your credit cards for at least 90 days before the date you file your petition for bankruptcy. If you do, the Bankruptcy Trustee or your creditors may take legal action to block your bankruptcy. The bankruptcy judge may look upon any charges made during that 90 days as fraudulent and the court may not not discharge (erase) those debts in your bankruptcy. You may have heard stories about people who run up all of their credit cards and go on vacations prior to filing bankruptcy, but the reality is that the Courts and creditors can and do act to stop this kind of abuse.

Sometimes credit card purchases are simply unavoidable. If you use a credit card for small purchases of "necessities of life" such as food, necessary clothing, gasoline, and similar items, and the amounts charged are relatively minor, it is unlikely that the court will require you to pay for such charges. While there are no hard and fast rules, keep in mind that you would be wise to charge only those expenses which are absolutely necessary for your family's survival and, even then, keep the amounts as small as possible.

Payments to Creditors Prior to Bankruptcy

Bankruptcy law requires you to treat all of your creditors equally. For example, you cannot repay a $10,000 personal loan to your parents and then file bankruptcy to avoid paying your credit card debt. If you pay any creditor $600 or more over and above the amount you would normally have paid it, Chapter 7 trustee can sue to recover the excess payment and instead distribute it among all of your creditors. This does not happen often, but you must keep it in mind as you prepare to file your bankruptcy.

This publication is NOT INTENDED TO SERVE AS A SUBSTITUTE FOR LEGAL ADVICE. Please consult with a licensed attorney if you require legal advice.

About the Author: Carl H. Starrett II has been a licensed attorney since 1993 and is a member in good standing with the California State Bar and the San Diego County Bar Association. Mr. Starrett practices in the areas of bankruptcy, business litigation, construction, corporate planning and debt collection.

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