On Behalf of Janus Law
Quick Summary
Filing for bankruptcy is a legal process governed by federal law, and the actions you take in the weeks and months before filing can significantly affect the outcome. Certain transfers, payments, and patterns of credit use are examined closely by the bankruptcy trustee. Understanding the most common pre-filing mistakes, and why they create problems, helps you protect your discharge and avoid complications that could delay or derail your case.
Why Pre-Filing Conduct Matters
When you file for bankruptcy, you are required to disclose your complete financial history going back several years. The bankruptcy petition and accompanying schedules ask about every asset you own, every debt you owe, every transfer of property you have made, every payment made to creditors in recent months, and your income from all sources. The trustee’s job is to review this information for accuracy and to identify anything that might indicate a creditor was harmed or that the petition does not reflect your true financial picture.
This scrutiny is not punitive. Most people who file for bankruptcy have made decisions under financial pressure that are entirely understandable in context. But some of those decisions, particularly repaying family members, using credit cards heavily before filing, or moving property out of your name, can have legal consequences within the bankruptcy case that are worth understanding before you take those steps.
The good news is that most pre-filing mistakes are avoidable with a consultation. Once you understand what the law requires and what the trustee will examine, you can take appropriate steps and avoid the actions most likely to complicate your case.
Repaying Family Members or Friends Before Filing
One of the most common and costly pre-filing mistakes is repaying a loan to a family member or close friend shortly before filing for bankruptcy. The motivation behind this is usually understandable. You may feel a personal obligation to repay someone who helped you when you were struggling. But bankruptcy law treats this type of payment as a preferential transfer.
Under federal bankruptcy law, payments made to insiders, which include relatives and people you have a close personal relationship with, within the one-year period before filing are subject to avoidance by the trustee. This means the trustee can sue the family member to recover the money, regardless of whether the original loan was legitimate. The same rule applies to non-insider creditors for payments made within 90 days of filing.
The result is that the family member who you tried to protect ends up being pulled into the bankruptcy case and forced to return the money. If you have made these kinds of payments, you may need to wait until the preference period has passed before filing, or you may need to disclose the payments and address the preference issue as part of the case. Your attorney will advise on the best approach based on the amounts involved and the timing.
Running Up Credit Card Debt Before Filing
Using credit cards to make large purchases or take cash advances in the 90 days before filing for bankruptcy is examined closely by the trustee and by the affected creditors. Under the Bankruptcy Code, there is a presumption that debt incurred for luxury goods or services above a certain dollar threshold within 90 days of filing was incurred without the intent to repay, which can make that debt non-dischargeable.
Courts look at patterns of use, the nature of the purchases, the timing relative to the filing date, and whether the cardholder had any realistic expectation of repaying the balance at the time of the charges. A single grocery purchase made two weeks before filing looks very different from a series of large charges at retailers in the weeks before filing while other debts are going unpaid.
The safest approach is to stop using credit cards as soon as you are seriously considering filing. If you have an urgent need, discuss it with your attorney before making any significant charges. Debts that are found to be non-dischargeable due to fraudulent intent survive the bankruptcy and remain legally collectible after the case closes.
Transferring or Selling Property Before Filing
Moving property to a family member, selling an asset below its market value, or removing your name from an account in anticipation of filing are actions the trustee will examine carefully. These transactions are analyzed under the fraudulent transfer provisions of both the Bankruptcy Code and California state law.
A fraudulent transfer in the bankruptcy context does not require intent to defraud in the criminal sense. Transfers made for less than reasonably equivalent value within two years of filing can be challenged regardless of what you intended. Transfers made while you were insolvent, or that rendered you insolvent, are particularly vulnerable. The look-back period for intentional fraud is even longer.
If a transfer is found to be avoidable, the trustee can sue to recover the property or its value for the benefit of creditors. The person who received the asset is named as a defendant in the adversary proceeding. This can create serious legal complications for family members who thought they were simply accepting a gift or a sale, with no understanding that it would be challenged in court. Consulting an attorney about your California bankruptcy exemptions before moving any assets is essential.
Failing to Disclose All Assets and Income
The bankruptcy petition requires complete disclosure of every asset, every income source, and every financial interest you hold. This includes assets that are not in your possession, income from gig work or self-employment, pending legal claims, interests in trusts, and assets held in other people’s names that you have a beneficial interest in.
Omissions, even innocent ones, can be challenged by the trustee as grounds to deny or revoke your discharge. Deliberate omissions can rise to the level of bankruptcy fraud, which carries criminal penalties. The standard the trustee applies is whether the omission deprived creditors of something they were entitled to know about.
People sometimes overlook income from part-time work, forget about a security deposit they are owed, or fail to list a vehicle held in a family member’s name that they use regularly. Others may not realize that a pending personal injury claim is an asset that must be disclosed even before any settlement is reached. Going through the schedules carefully with your attorney before filing ensures that the petition is complete and accurate, which is the single most important protection you have against a challenge to your discharge.
Not Speaking With an Attorney Before Taking Any Action
Many of the mistakes described above happen before a person ever contacts a bankruptcy attorney. Someone who is planning to file makes a payment to their parents, liquidates a retirement account to pay off a credit card, or transfers a vehicle title to a sibling, all without knowing that these actions will be scrutinized in detail once the case is filed. By the time they consult an attorney, the damage has already been done.
Consulting an attorney before making any significant financial move in the months leading up to a potential filing is the most important step you can take to protect your case. The guidance goes beyond what to avoid. An attorney can also advise on how to use California exemptions most effectively, whether to file Chapter 7 or Chapter 13, how to structure income documentation, and what the timeline should look like given the specific facts of your situation. Understanding how Chapter 13 fits into pre-filing planning can also help you evaluate whether restructuring rather than liquidation better protects the assets you care most about.
Pre-filing planning is not about hiding assets or evading creditors. It is about understanding the legal rules that govern the process and making decisions that align with those rules so that your discharge is protected and your case concludes successfully.
Planning to File? Avoid These Mistakes Before You Do.
The mistakes that complicate a bankruptcy case almost always happen before the filing. Janus Law works with individuals and families in Mission Hills and Riverside to make sure the steps taken before filing protect the case and the discharge. Call (818) 672-1778 to schedule a consultation.
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