What are Some of the Red Flags that Might Alert a Trustee?

A credit card, the biggest beneficiary of the ...

A credit card, the biggest beneficiary of the Marquette Bank decision (Photo credit: Wikipedia)

This question was recently raised by a blogger on a bankruptcy forum website: “We are in debt and considering filing for bankruptcy protection. What are some of the red flags that might alert a trustee?”

Here is a list of some of the things that may result in being a red flag for a bankruptcy trustee:

  • Running up balances on credit cards prior to filing for bankruptcy. Most trustees will look back at your spending habits for the six months prior to filing for bankruptcy. They can look back longer periods if they suspect there is fraud intended. They normally look for large luxurious items bought on credit cards that may red flag the trustee to some misuse of the credit card. If the trustee suspects abuse, they will file an abuse petition right off the bat in the bankruptcy, and it may cause your bankruptcy to be dismissed. Consult with your attorney before making any purchases on your credit cards the year before you file for bankruptcy.

  • Repaying creditors to the exclusion of others, especially if they are family members. Preferential treatment in paying unsecured debt is forbidden in bankruptcy cases. All unsecured debt is treated equally under the bankruptcy laws. You cannot pay specific debts to the exclusion of others, even more so if it is family members you owe. Expect the trustee to go after any preferential payments you have made up to a year before you file for bankruptcy.

  • Giving away, selling unreasonably low, or transferring assets to someone else just prior to filing bankruptcy. Probably the biggest red flag to alert a trustee is the transfer of assets prior to filing bankruptcy. Hiding these facts from a bankruptcy court can have very serious consequences because they are usually associated with fraudulent activity. A conviction of fraud by a bankruptcy court can land you in prison up to five years and/or a fine up to $250,000. The transfer of assets may not be illegal, but any transaction should be shared with the court. The court can look back a long ways in time if suspected fraud is considered.

  • Not listing any pending lawsuit as a potential asset. A common mistake made by many first time filers is forgetting to tell their lawyers or a trustee of any pending lawsuits where they stand to gain from the outcome. All must be reported to the court as potential assets. It is particularly important for a filer to discuss such potential with their bankruptcy lawyer before filing. These particular types of asset gains can be complicated when it comes to filing bankruptcy.

These are just some of the red flags that might alert a trustee when filing for bankruptcy protection. Honesty is always the best policy when filing. Bankruptcy is here for not only your benefit, but it is here for the benefit of creditors as well. Filing for bankruptcy protection provides both sides an ample opportunity to get out of a bad financial situation. It is a good idea to educate yourself on the bankruptcy process before you file.

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