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10 Common Bankruptcy Mistakes and How to Avoid Them

Thursday, December 04, 2014
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You've decided to declare bankruptcy. This is a brave first step in financial recovery. You still have some work ahead, but you're on the right track to righting your financial woes. Now that you've decided to face your debt head on, make sure to follow the correct steps to fully discharge your debts. We'll help you emerge debt-free from your bankruptcy.

Just don't make these common bankruptcy mistakes:

1. You procrastinate talking to a licensed trustee.

Don't wait too long before talking to a professional about your debt. If you have more debt than you can handle in monthly payments on your own, you should talk to a bankruptcy trustee to figure out a solution. Whether ultimately you choose to file bankruptcy or a consumer proposal or in fact resolve your debt problem without the help of a trustee, talking to a trustee early on gives you the information you need to make informed decisions.

Many people ignore their creditors rather than dealing with the problem head on. If you hide from your creditors, they will be forced to take extraordinary steps to recover the debt owed. You may experience asset seizures or wage garnishments that you could have avoided if you filed for bankruptcy earlier.

2. You use credit to pay debts.

If you haven't developed healthy financial habits, you may rely on a credit card for a large portion of your expenses. Don't try to pay off debts with a credit card. It doesn't actually get rid of the debt, it just transfers it to a different creditor with accompanying interest charges. On top of that, you may be charged with fraud for moving your debt around.

3. You pay off family debt first.

It may seem like a good idea to pay back friends and family right away. However, if you file for bankruptcy, your creditors will only receive a portion of the money they lent you. That means they will be anxious to receive as much payment as possible.

If you pay off family debt first, your action will be viewed as unfair preferential treatment. You could be forced to recover the money from your family members to pay off your debts to your other creditors.

4. You liquidate assets to pay your debts.

If you put off consulting a professional too long, you could sell off assets unnecessarily. Many of your assets, such as a car or your registered retirement savings plan (RRSP), are exempt from the assets used to pay off your debts. Don't liquidate assets you could retain - get professional advice first.

5. You try to keep assets you can't afford.

Alternately, many people try to hold on to assets that they can't afford with their current income. If you insist on keeping an expensive item that requires high monthly payments that exceed your income, you will quickly rack up new debt. Let go of expensive possessions that can send you back in debt (and possibly cause a second bankruptcy!).

6. You don't disclose all your income.

You are required to report all your income to your bankruptcy trustee when you begin the filing process. Your income determines how much of your debt you'll be required to pay before the balance is discharged. You may feel tempted to under report your income so you can pay a smaller share of your total debt.

However, your bankruptcy trustee will have access to your financial records to make the final decisions about your bankruptcy. You may have to make much larger payments than you would have if you had correctly reported your income.

7. You don't file all your tax returns.

If you have any significant unfiled tax returns, you will be required to file them before you can be discharged of your debts. Take care of your taxes before you file for bankruptcy and you won't experience any delays.

8. You use your credit card after you talk to a bankruptcy trustee.

Some people try to buy as many things as they can on credit before they file bankruptcy since they know they won't have to pay the full balance of their debt. This is not a good idea, since any purchases you make with credit within 90 days of filing for bankruptcy are not included in your bankruptcy debts.

You will very likely have to pay your credit card debt in full after declaring bankruptcy, and your creditors may accuse you of fraudulent borrowing.

If it looks like you have been using your credit cards even though you know you won't be able to make payments, then creditors may accuse you of borrowing fraudulently.

9. You assume bankruptcy will release you from secured debt.

Not all debt is covered by bankruptcy. You will still be required to pay secured debts, like a loan for a car or a mortgage payment. You must also pay all student loans in Canada if you graduated 7 years ago or less. You also cannot discharge child support or alimony payments that you owe.

10. You assume bankruptcy will erase the consequences of reckless spending.

If the courts determine that your bankruptcy was caused by an extravagant lifestyle, negligence, or gambling, you may be denied the option of bankruptcy. Don't look forward to bankruptcy as a catch-all solution to your financial woes.

Avoid these bankruptcy mistakes by consulting a bankruptcy trustee as soon as possible. You can avoid financial pitfalls and become debt-free much sooner.

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