Bankruptcy is a legal process that provides individuals with a clean financial slate. However, it is imperative to approach it with meticulous planning and compliance with the law to secure the most favorable financial future.

Engaging in deliberate pre-bankruptcy preparations can yield substantial benefits when considering bankruptcy. Strategic planning can result in cost savings, streamline bankruptcy proceedings, and even proactively address potential challenges from creditors or the bankruptcy trustee.

Pre-Bankruptcy Credit Counseling

Before you can secure a bankruptcy discharge under either Chapter 7 or Chapter 13, you must complete two educational courses, and one of these is credit counseling. It is an essential step in your bankruptcy journey. Credit counseling is a crucial prerequisite to initiating the bankruptcy process. It is designed to help you comprehensively evaluate your financial situation before proceeding.

To begin, you will need to engage with a nonprofit credit counseling agency within 180 days before filing for bankruptcy. The primary goal here is to thoroughly assess whether you can realistically manage your debt without bankruptcy, all while safeguarding your financial stability from further deterioration. This counseling session ensures that you explore all possible alternatives before moving forward.

During the credit counseling session, you will be tasked with providing a comprehensive overview of

your financial status by completing official bankruptcy forms. These forms require details about your:

  • Assets.
  • Income.
  • Expenses, and
  • Debts.

Doing so creates a holistic snapshot of your financial landscape. Additionally, you must provide proof of completing this credit counseling session, a critical requirement to validate your eligibility for bankruptcy.

Addressing the financial prerequisites for bankruptcy filing involves handling the filing fee. You have options:

  • You can submit the fee,
  • Request a fee waiver based on financial hardship or
  • Seek approval for fee installment payments, depending on your unique circumstances.

Once you have completed the credit counseling session, you will need to file the certificate of completion alongside your bankruptcy paperwork. Ensure this submission occurs within 15 days of your official bankruptcy filing date. It is tangible evidence that you have met the mandatory credit counseling requirement.

Beyond its role in fulfilling legal prerequisites, credit counseling also plays a pivotal role in assessing the viability of bankruptcy as a solution for your financial challenges. Typically, the counseling agency will help you construct a budget based on your income and expenses and explore potential avenues for debt repayment.

Note: While you are not obligated to accept the agency's proposed repayment plan, Section 109(h) of the Bankruptcy Code mandates only your participation in the counseling, not compliance with the agency's recommendations.

Protecting Your Assets

As individuals navigate the pre-planning phase of bankruptcy, they often have three burning issues on their minds:

  • Protecting bank account funds — The first question revolves around safeguarding the money in bank accounts to shield it from bankruptcy. Under this, you should explore bankruptcy exemptions, monitor account balances, and craft smart strategies to ensure these hard-earned funds remain intact.
  • Utility deposits after bankruptcy — Queries on utility deposits post-bankruptcy are also common. When should one expect these financial demands, how to budget for them, and what steps to take in preparation are critical aspects of this inquiry.
  • Halting automatic payment withdrawals — The final puzzle centers on stopping automatic withdrawals before filing for bankruptcy. Questions abound on stopping non-essential subscriptions, reaching creditors, and efficiently managing these automated transactions to sidestep financial complications.

Let us look at each issue in detail.

  1. Protecting Bank Account Funds

Shielding assets, particularly the balances in your bank accounts, can be quite a challenge when navigating the complexities of bankruptcy. Here is a closer look at some common issues related to bank accounts and strategies to tackle them:

Safeguarding Your Bank Account Funds

California allows for bank account exemptions. Typically, these exemptions cover only a modest amount.

When you initiate bankruptcy proceedings, the trustee assigned to your case will closely scrutinize the balance in your account on the filing date. Any funds exceeding the exemption threshold, including pending transactions like checks or charges, could be subject to seizure.

The solution is straightforward. You should maintain a conservative account balance by allocating your funds toward essential expenses before filing for bankruptcy. Keeping meticulous records and ensuring that your expenditures align with necessities like food, utilities, car repairs, and gasoline can help you navigate this process smoothly and comply with the trustee's expectations.

Preparing for Account Freezes

Some banks could choose to freeze your account upon receiving notification of your bankruptcy to safeguard assets on behalf of creditors. Should these frozen funds rightfully belong to you, particularly if they are post-filing income, you should reach out to your appointed bankruptcy trustee. They can instruct the bank to unfreeze these assets.

Additionally, many people have various financial dealings with a single bank, including car loans, credit cards, and different accounts. However, a potential issue arises from a contractual provision called a "set-off." This provision allows the bank to withdraw funds from your deposit account to cover outstanding loan balances. This can pose a significant concern and an additional expense when considering bankruptcy.

So, what's the solution?

You should manage your banking activities at a different financial institution than the one where you have outstanding debts. However, this does not mean concealing assets, closing an account, or omitting them from your bankruptcy paperwork. These actions have adverse implications.

Instead, the recommended course of action is to open new checking and savings accounts at a bank with no ties to your existing debts. Before proceeding with your bankruptcy filing, you can use these new accounts for your day-to-day banking needs. Notably, there is no need to close your current accounts. You can leave them open and ensure you report all your accounts when completing your bankruptcy paperwork.

There is another critical reason for having these new accounts. After your bankruptcy filing, the bank to which you owe money could opt to close your existing accounts. This can be problematic because many banks are reluctant to open new accounts shortly after a bankruptcy filing. While your bank could decide not to close your account if it is in good standing and free of other outstanding debts, this is not guaranteed. Hence, exercising caution is prudent, particularly when dealing with credit unions.

  1. Utility Deposits After Bankruptcy

When [preparing for bankruptcy, you should factor in the status of your utility deposits. They are subject to distinct regulations during bankruptcy proceedings.

If you are dealing with unpaid utility bills, your utility provider could tap into your security deposit to settle these outstanding debts when you file for bankruptcy. Therefore, it is wise to replenish your utility deposit, particularly if you had a due balance with the utility company at the time of your bankruptcy filing.

The timing of your bankruptcy filing becomes pivotal. Ensure you are not in arrears on your utility payments when you initiate bankruptcy. Doing so will prevent the application of your security deposit to unpaid utility bills. Notably, utility companies are within their rights to use your security deposit to offset overdue bills. However, they cannot demand payment for previous delinquent amounts to continue providing their services. These past-due utility debts are generally discharged as part of your bankruptcy case.

You must also understand the intricacies of utility companies' policies concerning security deposits. Utility providers could have specific constraints or stipulations governing the use and requisition of deposits within the context of bankruptcy cases. Acquainting yourself with these policies will help you make informed choices regarding your utility deposits.

  1. Halting Automatic Payment Withdrawals

When preparing for Chapter 7 or Chapter 13 bankruptcy, ensuring you have the funds needed for daily expenses is a top priority. One practical approach is to put a hold on automatic payments before you officially start the bankruptcy process. This step becomes especially pertinent if you have granted a creditor the authority to:

  • Bill your credit card for ongoing services or
  • Withdraw funds from your bank account or paycheck for a debt that will ultimately be discharged in the bankruptcy proceeding.

Upon filing for bankruptcy, creditors receive notifications, leading to a halt in automatic charges. However, if you have previously given the green light for automatic deductions from your bank account, credit card, or paycheck, these transactions might not stop immediately upon filing for bankruptcy. Processing your request can take some time.

While the automatic stay order, which essentially puts the brakes on most collection efforts, goes into effect the moment you file for bankruptcy, there is a waiting period of around one week before creditors officially receive the bankruptcy notice from the court. During this interim period, automatic payments could continue to be debited. Thus, it is best to factor in this delay and halt these automatic payments before your bankruptcy filing. This foresight can help you steer clear of potential financial complications.

Why Concealing Assets or Property in Bankruptcy is a Mistake

Bankruptcy laws are based on the principle of complete and truthful disclosure of all financial aspects, including assets, income, debts, and financial transactions. Attempting to transfer assets from your name to hide them from creditors or the bankruptcy trustee constitutes a clear bankruptcy fraud case. Such fraudulent actions carry significant consequences, and depending on the circumstances of the transfer, the trustee and the bankruptcy court can take several actions:

  • The bankruptcy trustee can reverse the transfer, reclaiming the property or assets. This ensures equitable distribution among creditors, guaranteeing they receive their rightful share of the available assets.
  • Engaging in fraudulent asset transfers could lead the bankruptcy court to decide against granting you a discharge. In practical terms, your debts will not be discharged through bankruptcy, leaving you responsible for repaying them in full.
  • Bankruptcy fraud is a federal offense with potentially severe consequences. Participating in fraudulent asset transfers can trigger criminal charges. The trustee has the authority to refer your case for a criminal investigation, which could result in prosecution. If convicted, you risk facing fines, imprisonment, or both.

Should I File for Bankruptcy or Divorce First?

The timing of bankruptcy and divorce is a critical decision. It can profoundly affect your financial and legal outcomes. Your choice should be based on a thorough evaluation of your specific circumstances.

Begin by conducting a comprehensive financial assessment, considering your total debts, assets, income, and the nature of your financial challenges. This assessment will be instrumental in determining whether bankruptcy or divorce is the more advantageous path for you.

An important factor is whether you and your spouse share joint debts. Whether you or only one of you should file for bankruptcy can significantly impact your choice between divorce and bankruptcy. This choice can also be crucial in dividing assets and debts during both processes.

When contemplating bankruptcy, the type of bankruptcy you are considering is important. Chapter 7 bankruptcy, known for its relative speed, typically takes three to four months to complete. It aims to discharge qualifying debts without necessitating a lengthy repayment plan. However, the bankruptcy trustee will assume control of non-exempt assets. This potentially delays the distribution of assets in a divorce.

Conversely, Chapter 13 bankruptcy involves a more extended repayment plan, spanning three to five years. Under this bankruptcy proceeding, both spouses must commit to filing jointly. While it is less common for couples to plan for Chapter 13 before a divorce, it is important to note that both spouses will share responsibility for the repayment plan. This can complicate divorce proceedings.

Additionally, an automatic stay will come into effect when filing for bankruptcy. This legal provision temporarily halts most creditor actions, including divorce proceedings. If you are already in the process of getting a divorce, this stay can introduce complications and cause delays in resolving issues like property division and alimony.

In both Chapter 7 and Chapter 13 bankruptcy, the actions of the bankruptcy trustee can impact how assets are distributed in your divorce. Non-exempt assets could be sold to satisfy creditors. This could reduce the pool of assets available for division during your divorce.

Note: Carefully consider the timing of your bankruptcy and divorce. While bankruptcy will not halt ongoing divorce proceedings, it could postpone the distribution of assets until after the bankruptcy case is concluded. This delay can have implications for property division, alimony arrangements, and child support obligations.

How Do Marital Settlement Agreements Affect Bankruptcy?

When you are in the midst of a divorce, and you anticipate the possibility of either you or your soon-to-be ex-spouse filing for bankruptcy, it becomes essential to secure the services of a family law attorney with an understanding of bankruptcy law. Not all family law attorneys possess the depth of expertise required in this intricate area of law, and the nuances of your case could involve complexities that affect both divorce and bankruptcy proceedings.

Here are a couple of critical considerations that warrant your attention:

Impact of Bankruptcy on Shared Debts in Divorce

Exercise prudence when contemplating the assumption of responsibility for debt in your ex-spouse's name. Operate under the assumption that bankruptcy proceedings, as a general rule, discharge debts solely in the name of the individual filing for bankruptcy.

No one wants to initiate bankruptcy proceedings only to discover that they remain legally obligated to repay the debts of their ex-spouse due to a family law order.

Support Orders From Property Division Obligations

Differentiate between a support order and an obligation under property division. Child or spousal support serves a specific purpose. They are designed to provide financial assistance to an ex-spouse to cover their everyday living expenses. In stark contrast, a property division settlement materializes when one spouse chooses to retain more substantial assets in exchange for an agreement that obliges the other spouse to make payments over an extended period.

For instance, one spouse could opt to retain ownership of assets, for example, the family car, the marital residence, or a business enterprise, while simultaneously agreeing to make deferred payments. In a Chapter 7 bankruptcy scenario, neither support obligations nor property division payments can be discharged. However, it is different under a Chapter 13 bankruptcy proceeding.

Although support obligations remain immune to discharge in both Chapter 7 and Chapter 13, Chapter 13 introduces the potential to eliminate a property division settlement. Consequently, payments classified as "support" offer higher financial security than those categorized as "property division" payments.

Find a Bankruptcy Attorney Near Me

Bankruptcy requires thorough planning and strategic decision-making, especially in the initial stages. When embarking on this journey, you need the guidance and expertise of a seasoned bankruptcy attorney.

The pre bankruptcy planning phase is significant, as it is here that potential challenges and complexities are proactively addressed. Your attorney will spot warning signs and devise practical solutions. This will effectively manage risks and pave the way for a smoother and more successful bankruptcy journey.

Bankruptcy is far from a one-size-fits-all remedy. The Los Angeles Bankruptcy Attorney will tailor our guidance to your unique needs and objectives. Whether your foremost aim is debt discharge, asset protection, or debt reorganization, we will ensure that your bankruptcy strategy is customized to realize your desired outcomes.

Contact us today at 424-285-5525 for further assistance.