Rough Guide Prior to Filing Bankruptcy

Below are some of the things that we generally recommend.  This can very from case to case and is intended to not be formal legal advice that should be taken without consulting with our firm or another equivalent practice.

Quick Checklist

1. We recommend that unless you have your checkings/savings account at a bank where you have no other accounts, that you should start a new bank account at a bank where you have no other accounts.  This is to avoid dragnet clauses.
2. We recommend that you avoid transferring any assets of any kind prior to filing.  Ask us first before you do or if you already did let us know.  A sale for market value is generally fine but you need an explanation for how the proceeds were spent.
3. We recommend that if possible, you de-activate auto payments and make all payments manually or be prepared to do so and double check on any auto payments you keep in place.
4. If you own a house, know that filing a bankruptcy will stop future credit reporting (even positively) and may make payments more challenging (some banks won’t send statements or allow you to have an online account).  You can usually resolve this by paying in branch or via mail and checking on the balance every several months (at least once per quarter)
5. If you own a house that is subject to a COA/HOA, stay current on those dues or get current.  Dues will continue to accrue post petition filing and they can foreclose in rem (meaning as to the property only) on dues that you have received a personal discharge on.
6. If you own a house but are not currently live in the home, let us know to make sure we can protect your homestead rights.
7. Some debts are non-dischargeable.   This generally includes family law debts, certain tax debts, student loans (unless a hardship applies or the school is not qualified), and restitution/debts owed to the government.  If any of these apply, speak with us so you understand how they will be treated.
8. If you have a security clearance, speak with us first regarding special procedures.
9. If you have made any luxury purchases in the last six months, speak with us first.
10. If you have a family member who may be passing in the next six months, speak with us regarding this as inheritance is considered an asset of a bankruptcy estate.
11. If you are expecting a windfall of any kind, let us know.
12. If you can be a plaintiff or defendant in any case, let us know.

Auto Payments

• Bankruptcy may disrupt auto-payments, consider cancelling all auto-payments
• If you are going to keep auto payments but are switching banks, you will need about 30-60 days for the switch to occur

Bank Accounts

• Understand what a dragnet clause is.  Generally, if you have more than one type of account (think checkings/saving, credit card, car loan) at a bank, each account is linked and subject a dragnet clause.  A dragnet clause means they can satisfy one account by taking from another.  So if you default on the credit card, the bank can take money out of your savings account.
• If your primary checkings/savings has no other accounts tied to it, you generally can keep it
• If your primary checkings/savings has other accounts tied to it,  you will want to open a new account at a new bank that is unconnected to any other accounts that you have.  We generally recommend a small, local bank or credit union.
• If you are opening a new bank account, you want to do so 30-60 days prior to filing to allow auto deposits from employers, social security, and other entities to switch over.

Credit Cards

• Generally, upon filing, all credit card accounts will be closed.  Even if you are current, this is likely.
• Know that you can get credit cards again after your case is over (and sometimes before) and you will want to get 3-5 cards and begin rebuilding your credit score
• We can counsel you regarding regular vs luxury purchases and the likelihood of a smooth discharge

Credit Report

• A bankruptcy will not remove prior negative tradelines but will require an update that says discharged in bankruptcy.  If that does not occur you can dispute with a FCRA letter and have it removed.
• The 9th circuit does not generally allow re-affirmation of houses.  That means your home loan will not report on your credit report.

Fraudulent Transfers

• A fraudulent transfer is generally when you transfer an asset to avoid a creditor and not at fair market value
• If you have a free and clear car worth $5,000.00 and you sell it to your friend for $1.00 just before filing, that is a fraudulent transfer.  If you sell it for $4,000.00, that is close enough to market value that you are likely fine.
• Generally you want to avoid transferring anything (property, vehicles, etc) without speaking to us first.  If you did transfer prior to speaking with us, bring it up so we can help you decide how to resolve.

HOA/COA

• Even if you are discharging old HOA/COA fees, new fees will occur immediately after you file and will continue accruing.  Your property can be foreclosed over the pre-petition fees even if there is no personal liability.
• Our best practice for clients is to get current on all HOA/COA dues and assessments prior to filing
• If you are going to default on the mortgage, stay current on HOA/COA dues post bankruptcy

Homestead

• In Washington State, you can only homestead property inside the state and only up to $125,000.00 in equity.
• A homestead is presumed if you are living in the property
• If you are not living in your property, you need to file a declaration of homestead and/or a declaration of non-abandonment of homestead and meet certain requirements.  Generally, you cannot be renting your property or trying to sell and must demonstrate an intent to return and live in the property.  Situations like military deployment, divorce proceedings involving DVPO, incarceration, or temporary absence due to illness or job requirements can allow you to maintain a homestead.
• Any declaration of homestead or non-abandonment of homestead must be filed and recorded with the county prior to filing for bankruptcy protection
• If your house does not have equity (meaning you owe more than its worth) then the court lacks the power to sell it and you do not have to worry about homestead issues

House Reaffirmation Complications

• Generally, judges in the 9th circuit (where we sit legally) do not sign off on reaffirmation of homes.  This means that technically you have severed the contract.  The uneasy peace that has developed is that banks will generally not foreclose if you continue making payments.  However, this also makes loan modifications complicated, stops banks from reporting (even positively) on your credit report, and banks will generally close your online account.  You will generally have to go in person or mail in house payments.  The solution is to refinance later when your credit improves or to sell if you are so inclined.

Luxury Purchases

• A luxury purchase is generally something that is out of the ordinary course of business and is not necessary for ordinary survival.  For example, we all need shoes but $50.00 sneakers will be seen as normal while $1,000.00 Jimmy Choo’s are generally not seen as necessary by the court.
• Generally, if you spend a certain amount per month on food, utilities, etc. those amounts will not be seen as luxury purchases as they are ordinary in your course of business
• Large purchases out of the ordinary will likely be scrutinized
• Any luxury purchases made within 90 days of filing are generally non-dischargeable (though a creditor must object).  If they are made more than 90 days it is more likely to be seen as dischargeable but it depends on what was purchased, how much it cost, and if anyone objects.

Mortgage

• In general, reaffirmations of mortgages are not signed off by judges in the 9th circuit
• If you plan to default on your mortgage, it is likely a good idea to time your bankruptcy to stop the foreclosure
• If you are defaulting on your mortgage, stay current on any HOA/COA dues
• If you believe there is a title defect or mortgage fraud, bring that to our attention so that we can properly list your litigation claim and properly list the the property without waiving your rights
• If you are keeping your property in a chapter 7, just keep making your payments
• If you are keeping your property in a chapter 13, you will make payments to the trustee

Security Clearances/Military Members

• If you have a security clearance, let us know.  We need to review your situation under the relevant statutes to ensure that bankruptcy makes sense and your security clearance will be retained.  We can then draft a letter or explain to you the basis for our recommendation.
• You will want to talk to your security clearance manager and run this recommendation up the chain.  Wait until you hear back and let us know when you are cleared to file.
• If you get a security clearance audit, we are happy to speak with the investigator and/or administrative law judge in regard to our recommendation and review of your situation.

Vehicles

• If you do not want to keep your car, it can be surrendered in the bankruptcy.  Keep insurance on the vehicle even if you intend to surrender up until the vehicle is dropped off or taken by the creditor.  Post petition damages could be your responsibility so you will want to stay insured.
• If you want to keep your car, you can sign a re-affirmation agreement to retain your vehicle
• If your car is worth significantly less than what is owed, consider a redemption where you just pay the blue book value of the vehicle (there are redemption loan companies if you lack the cash) and buy the car out of the bankruptcy free and clear of prior liens.
• An alternate technique if you like your car is to let it be repossessed and then buy it at auction which is even lower than trade in blue book value

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Information presented on this website does not constitute legal advice and does not establish an attorney client relationship. WA Debt Law, PLLC is a Debt Relief Agency.