Preparing for Bankruptcy: What You Can and Cannot Do Before Filing

Introduction

Preparing for bankruptcy is something many people do not understand. Bankruptcy does not start the day you file paperwork — it actually starts months before when you begin organizing your finances, reviewing your debts, and planning your financial reset.

There is a right way and a wrong way to prepare for bankruptcy. Understanding what you are allowed to do and what you should not do before filing bankruptcy can prevent serious problems with your case.

What Is Bankruptcy Planning?

It is legal to prepare for bankruptcy by organizing your finances and making smart financial decisions before filing. This is often called bankruptcy planning, and it is normal and common.

• Stopping the use of credit cards
• Saving money for filing fees and attorney fees
• Selling assets to pay necessary living expenses
• Catching up on rent or utilities
• Moving money into exempt assets in some cases
• Consulting with a lawyer
• Pulling credit reports
• Taking the required credit counseling course

What You Should NOT Do Before Bankruptcy

Before filing bankruptcy, there are certain things you should avoid because the court may consider them fraudulent.

• Buy luxury items on credit
• Take cash advances
• Transfer property to family members
• Pay back family members before filing
• Run up credit card balances
• Take new loans
• Sell assets for very cheap
• Hide money or assets
• Give away property
• Use credit knowing you plan to file bankruptcy

The 90-Day and 70-Day Rules

Bankruptcy courts look closely at purchases made before filing bankruptcy.

Examples of luxury purchases include TVs, furniture, electronics, jewelry, vacations, boats, and expensive items. If you buy luxury items within 90 days before filing bankruptcy, the court may assume you never intended to pay for them, and that debt may not be discharged.

What Happens If the Court Thinks It Was Fraud?

• The debt may not be discharged
• Your bankruptcy case may be dismissed
• You may be forced to file Chapter 13 instead
• You could be fined
• Bankruptcy discharge could be denied
• In extreme cases, fraud charges could occur

General Safe Rule Before Bankruptcy

• Stop using credit cards at least 6 months before filing
• Do not take cash advances for at least 6 months
• Do not transfer assets for 1–2 years before filing
• Do not pay back family members before filing
• Keep paying normal living expenses
• Keep records of all spending

What You CAN Spend Money On Before Bankruptcy

The court understands that people still need to live and pay normal bills before filing bankruptcy. These are usually considered reasonable and necessary expenses:

• Rent or mortgage
• Utilities
• Food
• Gas and transportation
• Insurance
• Medical expenses
• Car repairs
• Necessary household items
• Attorney fees
• Bankruptcy filing fees
• Taxes
• Child support or alimony

Steps to Prepare for Bankruptcy the Right Way

1. Stop using credit cards
2. Pull credit reports
3. List all debts
4. Create an income vs expense worksheet
5. Talk to a bankruptcy attorney
6. Wait a few months after last credit use
7. Take the required credit counseling course
8. File bankruptcy

Final Thoughts

Preparing for bankruptcy the right way can make a huge difference in how your case goes. Bankruptcy is meant to give people a fresh start, but how you handle your finances before filing is very important.

Avoid taking on new debt, stop using credit cards early, organize your financial information, and understand your income and expenses before filing. Proper planning can help the bankruptcy process go smoothly and help you start over financially.