Filing for bankruptcy can be a lifeline for those drowning in debt, but it’s also a complex legal process with serious financial consequences. One wrong move could cost you thousands of dollars, valuable assets, or even your case eligibility.
Whether you’re considering Chapter 7 (liquidation) or Chapter 13 (repayment plan), avoiding these 7 critical mistakes is essential to protecting your financial future.
Mistake #1: Waiting Too Long to File
Why It’s Dangerous:
- Creditors can escalate collections (lawsuits, wage garnishment, bank levies).
- You might lose assets (home foreclosure, car repossession).
- The longer you wait, the more debt piles up.
What to Do Instead:
✔ Consult a bankruptcy attorney early—even if you’re not ready to file.
✔ File before creditors take legal action (once they win a judgment, reversing it is harder).
Mistake #2: Transferring Assets to Family or Friends
Why It’s Dangerous:
- Bankruptcy courts scrutinize asset transfers before filing.
- If you give away property (cars, cash, real estate) within 2-5 years of filing, the court may:
- Reverse the transfer (take the asset back).
- Deny your discharge (you still owe debts).
- Accuse you of fraud (a federal crime).
What to Do Instead:
✔ Disclose all assets honestly—exemptions may protect them.
✔ Never hide or gift property before filing.
Mistake #3: Running Up Credit Cards Before Filing
Why It’s Dangerous:
- Recent luxury purchases ($650+ within 90 days of filing) can be deemed non-dischargeable.
- Creditors may argue you never intended to repay (fraudulent charges).
- Cash advances ($950+ within 70 days) are also red flags.
What to Do Instead:
✔ Stop using credit cards if bankruptcy is imminent.
✔ Only necessary expenses (groceries, utilities, medical bills) are safer.
Mistake #4: Choosing the Wrong Bankruptcy Chapter
Why It’s Dangerous:
- Chapter 7 vs. Chapter 13 have very different outcomes:
| Factor | Chapter 7 | Chapter 13 |
|---|---|---|
| Debt Discharge | Quick (3-6 months) | 3-5 year repayment plan |
| Income Limits | Must pass means test | No income cap |
| Asset Risk | Non-exempt property may be sold | Keep assets if payments are made |
- Filing the wrong chapter could force you into a repayment plan unnecessarily or lose your home.
What to Do Instead:
✔ Get a professional assessment—an attorney can determine the best path.
✔ Consider long-term impact (credit damage, asset protection).
Mistake #5: Ignoring Tax Debts & Student Loans
Why It’s Dangerous:
- Most tax debts and student loans CAN’T be discharged in bankruptcy.
- Exceptions exist (old tax debts, undue hardship for student loans), but courts rarely approve them.
What to Do Instead:
✔ Prioritize non-dischargeable debts in your financial plan.
✔ Explore alternatives (IRS payment plans, student loan forgiveness programs).
Mistake #6: Failing to Attend Credit Counseling
Why It’s Dangerous:
- Mandatory requirement: You must complete pre-filing credit counseling and post-filing debtor education.
- Skipping = case dismissal.
What to Do Instead:
✔ Use an approved agency (U.S. Trustee Program list).
✔ Complete courses early to avoid delays.
Mistake #7: Filing Without a Bankruptcy Lawyer
Why It’s Dangerous:
- Paperwork errors can get your case dismissed.
- Missing exemptions may cost you assets.
- Creditors may challenge your discharge.
What to Do Instead:
✔ Hire an experienced bankruptcy attorney—even in “simple” cases.
✔ Avoid cheap online filing services (they can’t give legal advice).
Bonus: How Bankruptcy Affects Your Credit
- Chapter 7 stays on your report for 10 years.
- Chapter 13 stays for 7 years.
- Rebuilding credit is possible (secured cards, timely payments).
Final Advice: Don’t Go It Alone
Bankruptcy laws are complex and unforgiving. A single mistake could:
- Lose your property
- Leave you stuck with debt
- Get your case thrown out
📞 Next Step: Consult a bankruptcy attorney for a low-cost or free evaluation before making any moves.
Act wisely—your financial future depends on it.