Except for those working in the Bankruptcy field, many repercussions of filing may not be self-evident. It can be easy for those helping you with your case to overlook these problems or correct your incorrect assumptions. It’s likely you don’t understand some of the blowback of filing for Bankruptcy. Let’s review a “Bakers Dozen List” of 13 of the most common repercussions and misconceptions about what can happen by filing for Bankruptcy. While these issues should be obvious. They often aren’t to everyone, so prepare yourself so you aren’t surprised by stepping on an unexpected landmine.
- You are the Debtor; those you owe are your Creditors. What you owe is your Debt.
- Documents Required are Crucial. The Bankruptcy Court relies on you to provide accurate financial documents, such as tax returns, pay stubs, bank records, etc. Because the Court is part of the US Department of Justice. They are a sister agency of the FBI and have access to all the government’s investigation tools. If you fail to provide documents, if you omit documents, or if you failed or “forgot” about an asset, you are asking for trouble. Not only will the Bankruptcy Court find out about the information if you don’t voluntarily cooperate. But the fact that you didn’t treat your case with the appropriate care will result in law enforcement conducting a comprehensive investigation of you. This situation is never pleasant and can result in criminal charges being brought against you for a very serious crime called “perjury.” You, not your attorney, will face the repercussions of this mistake. Ignoring this requirement, being foolish, or just plain stupid isn’t a legal defense. Please treat the information the Bankruptcy court requires with the serious attention it deserves, or find out the hard way.
- No Free Car or House. If your car or house is financed, the debt on it is secured, meaning that although the Bankruptcy ends YOUR obligation to repay the debt (and you can’t be sued to collect it), the property also owes this debt. As a result, if someone doesn’t pay for the car, the house, or other property being financed (whether a solar system, water treatment system, motor home, motorcycle, furniture, or appliances). The lender continues to have the right to repossess, foreclose, or otherwise seize the property.
- Credit Accounts Will be Closed. When your Bankruptcy is filed, every one of your creditors will quickly find out about it. Even if you didn’t list them and don’t owe them anything, your creditors will hear about your bankruptcy and close your account. So don’t pull into the gas station with an empty tank and expect to pay with a credit card you didn’t list in your Bankruptcy because it will be rejected.
- Creditors Stop Your Online Access. Creditors are prohibited from contacting you for payment when you file Bankruptcy. As a result, they don’t want to provide you with online communication tools or even an option to pay them. So, to pay your mortgage, car loan, or utilities, you may need to send payment through the mail.
- Bills and Living Expenses are Different Things. In Bankruptcy, paying bills means that you are repaying existing debts. If you pay unsecured bills, your bankruptcy trustee must take steps to recoup these funds. So, if you say you used your tax refund to pay your bills, expect problems. However, as you must pay your living expenses, you are fine if you used your tax refund to pay your rent, buy groceries, household supplies, pay utilities, or other current expenses. Your financial records verify how you spend your money. Be aware of what you pay and whether the payment is for bills or living expenses so that you answer your Trustee’s questions accurately. People often get into hot water because they do not understand the distinction between bills and living expenses.
- Credit Unions and Banks. Financial institutions often have a security interest in your deposit account (such as a checking or savings account). You may be unaware because when you opened your account, this information was described in the fine print. As a result, if you owe money to the credit union or bank where you deposit income or other funds. These institutions may “freeze” (or seize) the money in your account while you are in an active bankruptcy.
- Joint bank accounts. If you have a joint account with your spouse, child, parent, or other person, you have a potential problem when you file for Bankruptcy. The bank and the bankruptcy court usually treat those funds as if they belong entirely to you. As a result, if these accounts are with an institution that is one of your creditors, the money is likely to be frozen or seized.
- Tax Return vs Tax Refund. Your tax return is the paperwork you submit to the tax authorities. You must always give the Bankruptcy staff (usually your Trustee) copies of your tax return. Your tax refund is the money you receive from overpaying your taxes or tax credits. Depending on the type of Bankruptcy you file, the amount of the refund, the exemption laws available to you, and when your Bankruptcy is filed. You may have to surrender this refund, which will be used to pay a portion of your debts. If the Court requires the refund, they want the government check, not a check from your financial account. So, do not elect to receive your tax refund electronically via a direct deposit into your bank account. If your bank freezes the account, it may be a hassle to have this money released.
- Court Staff Must Treat You Courteously. You should not fear that meeting with your Trustee, or worry that it will be an angry or confrontational experience. It is not in the Trustee’s job description to blame you for filing for Bankruptcy or even hold you accountable for the decisions that got you to this place. The bankruptcy court and the court staff aren’t your Mother or Father. Unless, of course, you lie to them. If you do this, you will face worse problems than being scolded.
- Creditors seldom appear at the “Meeting of Creditors.” When Creditors appear at the 341 Meeting of Creditors, it is usually to find out about the location and condition of any secured asset (such as your car) and to confirm your intention. But if you owe an individual, this person may appear at the meeting and try to engage with you in a confrontational way. If the interaction becomes inappropriate or abusive, it is the Trustee’s job to shut down that conversation. If you are one of the few people with an angry creditor appearing at your 341 Meeting, stay calm and understand that unless you lie, what the creditor says is meaningless. The creditor has to file court paperwork to challenge your Bankruptcy.
- Meeting Deadlines and Being on Time is Crucial to the Success of Your Bankruptcy. Every legal proceeding operates on deadlines, but in bankruptcy court, missing deadlines can be catastrophic. Any “court” appearance, whether before an administrative judge, a bankruptcy trustee, or an actual judicial officer, requires on-time appearances. Sure, the court “might” be running late, but if you aren’t present when your case is called, your case may be continued to another day or even dismissed. Don’t take this chance. You are asking the bankruptcy court for help, and they require you to fully comply with their requirements.
- No Financial Transactions While Bankruptcy is Open. While your bankruptcy is open, selling your home or car, taking out a 401K loan, or cashing out any other asset requires the approval of your Trustee and sometimes even court approval. While in some situations, you may borrow money or incur debt during an open Bankruptcy without permission, not obtaining permission can be a fatal blow to your case. So, always ask about any financial decisions before acting.
Are there other obvious repercussions due to filing Bankruptcy? Please share the problems you did not expect when you filed for Bankruptcy in the comments section.
