6 Mistakes to Avoid Before Filing for Bankruptcy

1. Not Choosing the Right Chapter

The most common consumer bankruptcies are Chapter 7 and Chapter 13. However, there is a considerable level of difference between the two. Chapter 7 liquidates your assets as a means to pay off your outstanding debt, while Chapter 13 re-organizes your debt repayment schedule. Some people get confused between the two and end up realizing too late that they opted for the wrong one, after going halfway through the exhaustive process.

2. Withdrawing Funds from a Retirement Account

Retirement accounts, such as your 401(k), are exempt from bankruptcy proceedings. Many people, unaware of this, mistakenly withdraw funds from these accounts. However, such withdrawals are considered as income and are considered non-exempt.

3. Running up on Credits

Since filing for bankruptcy discharges your credit card debt, some people assume that they can get away with using their credit cards as much as possible before filing for bankruptcy. However, charges made 90 days before filing, or any cash advances taken out 70 days before filing, are not forgivable under a bankruptcy case, and the filer is still required to pay back the outstanding sum.

4. Transferring Assets to Someone Else’s Name

To avoid the risk of foreclosure, some people attempt to transfer the rights to their assets to a family member, friend, or person they can trust. However, doing so won’t actually guarantee the protection of your assets as transfers done with this intent is referred to as fraudulent conveyance. Courts are allowed to reverse such transfers if they occurred within four years of the day you file bankruptcy.

5. Paying Back Debt Owed to Family or Friends Before Filing for Bankruptcy

Family and friends often come first, but unfortunately, debt is a definite exception. If you pay back the debt you owe to your family or friends before filing for bankruptcy, the trustee may deem it a case of preferential payment and could potentially file a lawsuit against them for the return of these payments.

6. Not Taking the Help of an Attorney

Another major mistake many people make before filing for bankruptcy is not to take legal aid from an attorney to help them through the process. Most attorneys offer free consultations and can help you find the best route through the complicated legal process to ensure that the end results of the entire bankruptcy process are more in your favor.

Even today, many Americans have little knowledge of bankruptcy, which is why they end up making the wrong choices in the process that end up costing them dearly. Here are 5 mistakes to avoid before filing for bankruptcy. For a free consultation on consumer bankruptcy and more, book an appointment with the Law Offices of Sean T. Flynn by calling 512.640.3340 and scheduling one directly online.  

Are Retirement Accounts Exempt in Bankruptcy Cases?

Many people fear filing for bankruptcy, thinking that their retirement accounts might be compromised in the bankruptcy process. However, in the overwhelming majority of cases, your retirement accounts are legally protected from creditors during a bankruptcy case. Continue reading to know more about how retirement accounts are exempt in bankruptcy cases and what the limitations are.

Legal Protections

Since Congress brought changes to the bankruptcy laws in 2005, virtually all ERISA-qualified retirement accounts and pension plan funds are exempt from creditors, including 401(k) accounts. With that being said, it would still be a good idea to check with your employer whether 401(k) is ERISA qualified before filing for bankruptcy.

Chapter 13 Bankruptcy

In Chapter 13 Bankruptcy, your assets are not liquidated, but instead, they are used in judging your ability to pay back your creditors during the court-approved three- to five-year repayment plan. Is the balance in your retirement accounts used in their judgment? The answer is no. All ERISA-qualified retirement accounts are exempt from the judgment, and the balance in them does not affect how much you have to pay in your repayment plan.

Limitations on Legal Protection

Even though your retirement funds are exempt from bankruptcy, there are still a few limitations you should be aware of.

Withdrawn Retirement Benefits

If you withdraw money from your retirement account and use it to purchase an asset or transfer it to a regular account, that amount would no longer be considered protected, and will be used up in your bankruptcy case. Additionally, the monthly payment you receive from it will be figured into your means test qualification in case of Chapter 7 bankruptcy or what portion of your unsecured debts you must repay in case of Chapter 13 bankruptcy.

IRA Limitations

For both IRAs and Roth IRAs, the exempted amount is limited to $1,362,800 per person. If you have more than this in your retirement accounts, the excess funds may be taken by the bankruptcy court to pay back creditors. To account for changes in living expenses, the exempt limit is adjusted every three years, and the next time it will be so is in 2022.


It is essential to know that general savings accounts, investment accounts, and stock option plans are not considered as retirement accounts, and thus, would not be afforded protection during the bankruptcy process. Additionally, if the court deems your retirement account to be fraudulent, it would be disqualified from legal protection.

Are you considering filing for bankruptcy and in need of legal assistance? Book an appointment online or call at 512-640-3340 for a free consultation with a seasoned attorney at the Law Offices of Sean T. Flynn.

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