Stop Using Your Credit Cards
This is the most important step. The moment you start considering bankruptcy, stop charging. Continuing to use credit cards when you intend to file can create legal problems:
- Charges made with no intent to repay can be challenged as fraud under Section 523(a)(2)(A)
- Luxury purchases over $800 within 90 days are presumed nondischargeable
- Cash advances over $1,100 within 70 days are presumed nondischargeable
The rule: If you know you are going to file, stop using credit immediately. Use cash or debit only. The closer charges are to your filing date, the more scrutiny they receive.
Gather Your Credit Card Statements
You will need the following for each credit card account:
- Creditor name and mailing address
- Account number
- Current balance
- Date the account was opened
- Last 12 months of statements (for the means test and to check for preference payments)
Pull a free credit report from annualcreditreport.com to make sure you are not forgetting any accounts. You must list every debt in your bankruptcy petition -- even debts you have not thought about in years.
Complete Credit Counseling
Federal law requires you to complete a credit counseling session from an approved agency within 180 days before filing. This is not optional. Your case will be dismissed if you file without it.
The session takes about 60-90 minutes and can be done online or by phone. The agency will issue a certificate of completion that you file with your petition. Cost is typically $25-$50, with fee waivers available.
List of approved agencies: DOJ Approved Credit Counseling Agencies
Common Mistakes to Avoid
- Do not transfer balances between cards. Balance transfers before filing can be challenged as fraudulent. See balance transfer traps.
- Do not pay one credit card over others. Paying a family member's card or a favored creditor more than $600 within 90 days creates a preference that the trustee can recover.
- Do not take cash advances. Cash advances within 70 days are presumed nondischargeable.
- Do not pay off a card to keep it open. You cannot selectively exclude a card from your bankruptcy. All debts must be listed.
- Do not close accounts yourself. Let the bankruptcy process handle it. Closing cards before filing does not help and can affect your credit utilization ratio.
Timing Considerations
There is no perfect time to file, but these factors affect timing:
- Income changes: The means test uses your average monthly income for the 6 months before filing. If you recently lost a job or had income drop, waiting may help you qualify for Chapter 7.
- Tax refunds: A large pending tax refund may be claimed by the trustee. Consider filing after receiving and spending the refund on necessities.
- Lawsuits: If a creditor has already sued you or is about to, filing sooner stops the lawsuit through the automatic stay.
- Wage garnishment: If wages are being garnished, filing immediately stops the garnishment.