Bankruptcy Risks

The benefits. The benefits of a successful bankruptcy are unequalled and can be obtained nowhere else. However, bankruptcy is not without its perils and the filing of a bankruptcy could be an irreversible decision. The goal is to identify and evaluate each of these risks and do it right the first time. If one does not do it right the first time, there may not be a second time.

Not all bankruptcies are risky. But for the ones that are, with full disclosure to bankruptcy counsel, the dangerous areas can normally be identified and avoided. Some of them are:

Urgencies. The very first and most dangerous risk is not to know when a bankruptcy filing is urgent. Bankruptcy immediately alters the laws that govern the debtors, creditors and taxing authorities. Knowing when to file a bankruptcy - and when not to - is absolutely essential. Sometimes filing a bankruptcy very urgent.

Transfers. A transfer is selling or moving an asset into someone else's name or otherwise putting it out of the reach of creditors. Practically any transfer is legal, but no significant transfer is without some impact on a future bankruptcy. Some transfers can render the filing of a bankruptcy to be a crime, or otherwise ruin ones chances for a bankruptcy discharge of debt. Transfers can be quite risky.

Tax impact. Although a bankruptcy discharge is not a taxable event, it is not without its taxable effects. This must be taken into account and firmly established before filing, so there is no doubt about the effect on taxes.

Chapter 11 perils. The two classic exposures for the Chapter 11 debtor are 1) loss of the business due to a conversion to a Chapter 7 because debtor has too little assets to finance a plan of reorganization, and 2) the (far less likely) loss of the business because the debtor has too much assets, so creditors file competing plans and take the business.

Irreversibility. The filing of a bankruptcy alters practically all of the civil laws that govern debtors, creditors and collections. To predict its impact, one must take into account all of those laws because the filing of a bankruptcy may be irreversible. One must be certain of what will happen before the case is filed.

Loss of assets. The instant that a debtor files a bankruptcy he or she transfers ownership of all of his assets to a trustee in bankruptcy. Later his exempt assets return in ownership to him. The debtor must make certain that he knows what will be lost and what will not be lost before he files. There are legal and effective ways to preserve assets, and there are illegal ways and ineffective ways to preserve assets. The latter can result in not only loss of assets but also result in criminal prosecution. Sometimes the law is just not clear about which is which. One must carefully review these issues to be able to tell the difference in advance.

Crimes. Concealment of assets and failure to make full disclosures are federal crimes.

Filing time. The filing time of a bankruptcy can have a vast impact. This must be anticipated before the case is filed.

Which Bankruptcy? It is often difficult to determine which bankruptcy proceeding is best. And once the case has been filed, switching from one type of bankruptcy to another can have adverse consequences.

Hidden creditors. Many people have creditors that they are not aware of. Creditors who don't receive proper notice will not be discharged. Bankruptcy preparation should include some method to search for hidden creditors.

Lawsuits against family members and other creditors. Did you repay a family member a significant amount of money within a year of filing your bankruptcy? If the debt to the family member was past due, you may have to wait a year from the time of payment to file. Otherwise the family member may have to give it to the bankruptcy trustee.>

Loss of credit. Although the loss of credit is far less than some would have the debtor believe, bankruptcy will definitely injure credit. But the reality is that when it is impossible to pay all of ones debts, bad credit is inevitable. However, it is often worse when someone who should file does not. Good credit will ultimately return to the person who really needs to file bankruptcy, and gets a discharge of debt. That person has a fresh start, without debt, and he is then free to rebuild not only credit but financial security.

Bankruptcy is a very specialized field of law. It is the only area of the law that has its own courts, its own judges, its own procedure and its own laws. All of these exist just for bankruptcy. Bankruptcy can be immensely beneficial under the right circumstances, but it is not for everyone.

Charles Chesnutt