Claiming bankruptcy is a difficult process and contrary to what most people expect, it is also a rather expensive one.  To maximize the amount of money you can save, many people try to hide their assets before going bankrupt.  Moving money before bankruptcy is tricky and it is always best to consult a qualified bankruptcy attorney prior to transferring anything.  That being said, the following list of “dos and do nots” should give you an idea of what is possible and what isn’t.

Things You Can Do

•    Reduce your withholding for tax – If you expect a refund this is a wise move to prevent you from losing it through bankruptcy.  If you expect to get a refund that is due to Earned Income Tax Credit, complete form W-5 through your employer to arrange to receive the refund as part of your monthly pay.

•    Maximize payments to non-dischargeable debts – Consider which debts are dischargeable and which are not, then focus on trying to pay off those which will survive bankruptcy.

•    Give security interest for loans – Friendly creditors such as family and friends who wish to help you out by giving you a loan should be offered a security interest in assets such as your vehicle or property.  This could even convince the court to allow you to keep your vehicle.  Ensure that you do not try to set this up for loans given previously as this could result in your case being denied discharge.

•    Give up your vehicle – If you owe more on your vehicle than it is worth, giving it up might make the most sense.

Things You Should Not Do

•    Continue making payments to dischargeable debts – You should focus on the debt that is going to survive the bankruptcy and still require payment at the end of it.

•    Transfer property – Putting property into someone else’s name prior to bankruptcy to avoid it being taken by creditors is considered fraud on creditors and can result in your discharge being denied.

•    Pay back to relatives or business associates – If you choose to pay $500 or more towards debts involving relatives or business associates within one year prior to bankruptcy, it could be considered preference.

•    Contribute to a retirement fund – Retirement funds are considered an exempt item and unless it is a usual occurrence, large contributions may be considered fraud.

•    Abuse your credit card – Right before filing many people take the opportunity to rack up credit card debt as it is dischargeable; however, purchases of luxury goods and withdrawals of cash advances occurring in the months immediately preceding a filing for bankruptcy are not included and will still need to be paid by the debtor.

Another thing to take into consideration is the fact that the laws regarding what is and is not permissible with regards to moving money before bankruptcy are not black and white; therefore, it may be possible to get a lenient judge, but don’t count on it!  The guidelines of what should and shouldn’t do are there to prevent you from making any payments that could be considered preferential or transfers considered fraudulent.

•    Preference Payments – Section 547 of the U.S. Bankruptcy Code states that a trustee can demand the creditor return the money given to them if more than $500 was given to a creditor within 90 days prior to the petition or given to a family member or business associate within 1 year prior to the petition.

•    Fraudulent Transfers – Section 548 of the U.S. Bankruptcy Code considers any transfer to hide money within 2 years prior to the petition date.  This includes such actions as selling property for less than its actual value or transferring money to someone else with the intention of hiding it from the Bankruptcy Court.  The law differentiates between a Constructive Fraudulent Transfer and an Actual Fraudulent Transfer with the intent of deceiving the court.  In which case the trustee can litigate to have it removed from the recipient.  It should be noted that ‘look back’ periods differ from state to state and while the norm is 2 years, it can be up to 7 years.

Each state has bankruptcy exemptions to a certain amount of money for each type of asset but to avoid any legal trouble that might result in your case being denied, it is recommended to speak to an attorney before transferring significant assets with the intent to save money.  Financial advisors and bankruptcy specialists are experts at knowing what will and will not be permitted in your state, so rather than taking the risk and potentially ending up with a denied discharge, consult a professional if you are considering moving money before bankruptcy.

To find out if the personal bankruptcy process is right for you, consider filling out our free bankruptcy evaluation.