Chapter 13 Bankruptcy Do's and Don'ts

1. Be Patient

When I said bankruptcy “process,” I really meant it’s a process.  Filing for bankruptcy relief is comparable to filing your taxes.

For some people, it can be a relatively swift and easy process, but for the majority of folks, it will take time to gather the necessary documents and information.  Once you have provided all the information to your attorney, it will still take some time to get the bankruptcy forms prepared and to review everything for accuracy.

A bankruptcy petition is considered a sworn statement to the court.  As a result, you definitely want to make sure that everything is correct.

2. Take a Credit Counseling Course

With limited exceptions, every individual who files bankruptcy must complete an approved credit counseling course within 180 days before the case is filed.  At Bond & Botes, we assist our clients in the process by helping them get in touch with approved credit counseling providers; Alabama filers should use providers approved by the Bankruptcy Administrator, while Mississippi filers generally use providers approved by the U.S. Trustee Program.  If you are filing pro se, be aware that your case can be dismissed if you file before completing the required credit counseling course and obtaining the certificate.  This is separate from the debtor education course required after filing and before discharge.

3. Keep Track of Financial Documents.

This is a big part of filing a case and can really speed up the process.  Keep copies of your tax returns, W-2’s, and other financial documents.

Not only will you need these in order to prepare the bankruptcy petition, but you may also be required to provide copies to the Bankruptcy Trustee.  You can seriously delay or jeopardize your case if you can’t turn over financial records requested by the Trustee.

4. Don’t Make Payments or Property Transfers to Family or Friends.

If you’re considering Bankruptcy, then you may be tempted to consider transferring vehicles or land to trusted friends or family members so the Court won’t try to take the property.  Absolutely Do NOT Do This!

When filing for bankruptcy relief you are required to disclose recent transfers, including transfers that happened within the last 2 years.  In some situations, such as certain transfers to self-settled trusts or similar devices, a trustee may be able to look back up to 10 years, and other look-back periods may apply under state law.  The trustee may ask the Court to avoid or recover an improper transfer.

If you are interested in getting financial help through a bankruptcy, then before you make any changes speak to an experienced bankruptcy attorney.  Your attorney can help you plan for multiple situations.

5. Don’t Try to Hide Assets.

I often meet with people who tell me that they have a family member driving a vehicle in their name.  The story usually goes “It’s really their car, but it’s just still titled in my name.”  In that situation, it is still your car in the eyes of the Bankruptcy Court.  That means we still must disclose to the Court that you own that car.

Remember that the Bankruptcy Petition is a sworn statement.  An attempt to hide or conceal information from the Court can be considered perjury and can result in criminal charges!

A Lawyer Can Help

As always, a knowledgeable bankruptcy attorney can help you with all of these issues.  The standard forms for bankruptcy have been modified in an effort to make them easier to read and understand, but bankruptcy is still a complicated area.  Even other attorneys tend to avoid bankruptcy law!

Chapter 13 “Do’s” and “Don’ts”

Unlike a Chapter 7 liquidation bankruptcy case, a Chapter 13 reorganization case can last for several years.  In fact, a typical Chapter 13 case runs for 3 to 5 years, depending on income, plan terms, and court approval; in most cases, a plan cannot provide for payments longer than 60 months, or 5 years.

Clearly, the Court can’t expect someone to put their life on hold for 5 years.  Here are some of the things you can and cannot do while in a Chapter 13 case.

1. Don’t Sell Any Property Without Court Approval

When you file a bankruptcy case, you create something called the “Bankruptcy Estate.”  The estate generally includes your property interests at filing, and in a Chapter 13 case it can also include property and earnings you acquire after filing and before the case is closed, dismissed, or converted, with limited exceptions.

Generally, real estate, vehicles, and other assets you own, and certain assets you acquire during a Chapter 13 case, may be part of the estate.  Before you sell, refinance, or transfer estate property, you should speak with your attorney because court or trustee approval may be required.  The rationale behind this is that the Court doesn’t want people trying to hide assets.

If a person sells 100 acres of land to his brother for $20, then it’s obvious that the “sale” was just to get the land out of his name in the first place.  An arm’s-length sale for fair market value is usually easier to approve, but you should still obtain any required court or trustee approval before transferring property.

2. Don’t Use Credit While You’re in A Chapter 13 Case

Despite what you may think about bankruptcy ruining your credit, it is actually surprisingly common for creditors to offer loans to people who have filed cases.  However, the purpose behind filing a case in the first place is to get you OUT of debt, not into more of it.

For this reason, you should not incur new debt or borrow money while still in a Chapter 13 case without first consulting your attorney and the trustee; court or trustee approval may be required.  The Court wants to make sure that you won’t get right back into a bad financial situation or be taken advantage of by a creditor.

Typically, this issue comes up for people who need to buy new cars.  The Court realizes that having a vehicle is a basic necessity of modern life, so many courts have procedures to request permission to use credit if your old car is wrecked or completely breaks down.  Just be sure to check with a qualified bankruptcy attorney who can help you through your Court’s procedures.

3. Tell Your Bankruptcy Attorney About Any Lawsuit or Potential Lawsuit You May Be A Part Of.

No one ever plans to be part of a lawsuit, but it is an unfortunate reality that accidents happen.  If you’re in a car wreck or you’re injured while you are in a Chapter 13 case, and you are considering filing a lawsuit to recover for your injuries, make sure you tell your bankruptcy attorney.

When you’re in a Chapter 13 case, you have a duty to disclose lawsuits to the Court.  If you don’t do so, then the party you file a case against can use that failure to disclose as a defense against the lawsuit.

In some circumstances, failing to disclose a claim can seriously damage or even bar the lawsuit.  The consequences can mean you may never be able to get reimbursed for medical costs or other injuries you’ve suffered if you don’t communicate with your bankruptcy attorney or the Court.

4. Tell Your Attorney if You’re Receiving Money from Another Source

Be sure to let your attorney know if you’re going to receive money from an outside source.  The most common situations are when a person receives money from insurance or from an inheritance.

Suppose you are in a car wreck and your insurance company is going to be paying you the proceeds from your insurance policy to help you buy a new vehicle.  Before those funds are paid or used, you may need permission from the bankruptcy court and direction on where the proceeds should go.

Depending on your plan, any lien on the vehicle, and your local court procedures, insurance money may need to be paid to the Chapter 13 Trustee, the lienholder, or another party before any remaining funds are distributed to you.  If you don’t notify your attorney that you’ve been in a wreck and will be receiving money, then it can greatly delay the entire process and keep you from getting a replacement vehicle.

5. Tell Your Attorney If You Will Be Receiving an Inheritance of Any Kind.

Bankruptcy is usually the last thing on a person’s mind after losing a loved one, but failing to disclose this information to the Court can be devastating to your case.  If you will be receiving an inheritance (either real estate or cash), then you must tell your bankruptcy attorney.

Typically, if you will be receiving money from an inheritance, you may be able to claim some of it as exempt.  In a Chapter 13 case, an inheritance may become property of the bankruptcy estate, and non-exempt funds may need to be paid into your plan before any excess funds are returned to you.

I know you may think it is unfair to use inheritance to pay your debts, but trying to hide an inheritance from the Court could be much, much worse.  The Court has the power to dismiss your case immediately for failure to disclose information.

Further, if the Judge determines you tried to lie or falsify information to the Court, then the Court may deny or revoke your discharge or impose other penalties, effectively making it difficult or impossible to receive the bankruptcy relief you sought.  Since lying to the Court is considered perjury, the Judge could also refer your case to the U.S. Attorney’s Office for criminal prosecution.

Contact a Bankruptcy Attorney Today to Discuss Your Options

A Chapter 13 bankruptcy case can provide meaningful relief from your debts and help you reorganize your financial life.  However, as you can see, the process can be lengthy and difficult.  Very rarely will a case make it all the way to completion without the help of an experienced attorney.

If you are having financial trouble and you’re thinking about filing for bankruptcy, please make an appointment to come see us at Bond & Botes.  Our attorneys have years of experience handling all aspects of bankruptcy.  We offer free initial consultations and we have convenient offices in Alabama and Mississippi.

At Bond & Botes, our attorneys focus on helping people navigate the difficulties in the bankruptcy process.  If you are considering filing, don’t go through it alone.  Each of our convenient locations offers free initial consultations.  We’d be happy to help guide you back to financial stability.