If you’re considering filing bankruptcy, generally don’t sell or give away your possessions—including collateral—or use retirement money.
Last week we made the point that if bankruptcy is even a possibility for you, please quickly get legal advice. We said you should get legal advice to find out:
- if bankruptcy is indeed the best option for you
- how Chapter 7, 11, 12, and 13 work, and whether one is right for you
- what actions you should take to position yourself for either a possible or definite filing
- what you should avoid doing
- the best timing for your bankruptcy filing
We covered items 1 and 2 last week. Today we get into #3: actions to take if you may be filing bankruptcy.
Keep Your Assets
In normal circumstances selling your possessions to pay debts may make sense. If you have stuff you don’t need, selling it to raise money seems like an obvious step to take. But doing so may be unnecessary, or may be bad timing.
You might have heard that there are limits on what and how much you can own when you file bankruptcy. So you figure selling some of your possessions would position you better for bankruptcy.
But this is often unnecessary because for most people their possessions are protected in bankruptcy. You are entitled to “exemptions”—a list of types and amounts of possessions that you can keep. With most people everything they own is covered by their exemptions. When that’s not true, Chapter 13 “adjustment of debts” provides additional protection.
Selling your possessions before filing bankruptcy also doesn’t make sense for timing reasons, in two ways.
First, selling a possession may make much more sense after filing bankruptcy. Instead of paying the proceeds to whichever creditor is being the most pushy, you can be more strategic. Instead of paying a debt that was being “discharged” (written off), you’d put your money on your most important surviving debt.
Second, if you sell a possession before bankruptcy, under certain circumstances the recipient may have to give it back. It would go “back” to your bankruptcy trustee. This could cause all kinds of challenges, especially if the purchaser was your relative or friend. This is also a reason not to give away or sell possessions for less than full value.
Keep Retirement Funds
One example of the above advice is so important it deserves its own section. One type of possession—retirement money—is extremely well protected by exemptions. Just about all forms of money or other assets are protected. Furthermore the amounts protected are usually more than most people have. So using retirement money to pay debts for anyone who ends up filing bankruptcy is usually highly unwise.
By all means, do not do so without first getting legal advice.
Keep Your Vehicle, Home, Other Collateral
Do what you can to keep your vehicle from repossession or surrender. Bankruptcy often enables you to deal with a vehicle loan better. Chapter 7 discharges other debts so that you can afford to make the vehicle payments. Chapter 13 may allow you to do a “cramdown.” This could reduce the monthly payments, the interest rate, and usually the total amount you pay, often significantly. But these are possible only if you still have possession of the vehicle at time of your bankruptcy filing.
With a home mortgage the situation is different but the general rule is similar. Bankruptcy gives you tools for dealing with your mortgage. Chapter 7 allows you to focus your finances on your home. If that’s not enough, Chapter 13 gives you up to 5 years (rarely, up to 7 years) to catch up. So, don’t give up on your home before getting bankruptcy advice about your options.
Debts on other collateral—furniture loans and such—are also often handled well in bankruptcy. Sometimes the creditor does not even have a legal right to the purchased “collateral.” But even if it does, you can often keep the collateral for less than the balance on the debt. So you may be able to keep the collateral and pay nothing or less than you expect. Therefore, don’t surrender it or let it be repossessed before filing bankruptcy.
Let’s end where we started. If bankruptcy is a real possibility, get legal advice. There are dozens of financial steps you’ll be tempted to take to improve your situation. As you’ve seen above, actions that seem to make sense at the time can hurt you if you end up filing bankruptcy. But whether any particular step actually make sense usually depend on your personal situation.
For example, we’ve said that it’s often a good idea to prevent your vehicle lender from repossessing your vehicle. That’s because you can often save your vehicle once you file bankruptcy. But there are circumstances in which surrendering a vehicle does make sense:
- You may not need the vehicle, say because you have access to other reliable transportation.
- The tools of bankruptcy may not help you afford the loan—say because it doesn’t qualify for “cramdown.”
- Maybe the vehicle loan was a bad deal so it’s best to get out of it and write off any balance.
- You’re likely going to be filing a Chapter 7 case, so you wouldn’t be left owing that deficiency balance.
Simply put, to learn what actions are truly right for you, you need personal bankruptcy advice. Considering that an initial consultation with a bankruptcy lawyer is usually free, there is no downside. Furthermore, making informed choices feels infinitely better than running blind.