15 Things to Avoid Before Filing Bankruptcy

Filing for bankruptcy can be a smart financial decision when you’re overwhelmed with debt, but certain mistakes before filing can complicate your case, delay your discharge, or even cause you to lose assets.

To ensure a smooth bankruptcy process, avoid these 15 common mistakes before filing Chapter 7 or Chapter 13 bankruptcy in Virginia (or anywhere else in the U.S.).

1. Paying Back Family or Friends (Insider Payments)

Many people want to repay family members or friends before filing bankruptcy. However, these payments are considered “preferential transfers/payments” if they occur within one year before filing.

If you repay a personal loan to an insider (family, close friends, business partners), the bankruptcy trustee can sue that person to get the money back and distribute it evenly to creditors.

✅ What to Do Instead: Hold off on repaying personal loans until after bankruptcy. Your attorney can help plan the best timing. If you have already paid a family member or friend, you must disclose the payment and your attorney can review potential defense to any preference payments.

2. Transferring or Gifting Assets (Fraudulent Transfers)

Giving away assets or selling them for less than fair market value before bankruptcy can be considered fraudulent. The trustee can undo these transfers and seize the asset to pay creditors.

🚨 Example: Signing over a car to a family member for $1 before filing won’t protect it—the trustee can reverse the transfer.

✅ What to Do Instead: Always consult an attorney before transferring, selling, or gifting property before bankruptcy.

3. Taking Large Cash Withdrawals

Withdrawing large amounts of cash before filing raises red flags. The trustee will demand proof of how the money was spent. If you can’t provide a clear paper trail, they may assume you’re hiding money.

🚨 Example: You withdraw $7,000 in cash before filing but have no receipts showing where it went.

✅ What to Do Instead: Keep your transactions electronic when possible and avoid unexplained cash withdrawals.

4. Running Up Debt Right Before Filing

Debt incurred right before bankruptcy can be challenged as fraud and may not be discharged.

📌 Credit card purchases over $800 within 90 days or cash advances over $1,100 within 70 days before filing are presumed fraudulent.

✅ What to Do Instead: Stop using credit cards if you’re considering bankruptcy. Avoid large purchases or cash advances.

5. Hiding or Failing to Disclose Assets

All assets must be listed in your bankruptcy paperwork, including:

• Bank accounts (even with zero balances)
• Cryptocurrency, PayPal, Venmo, and Cash App balances
• Intangible Assets, like Lawsuits, inheritances, and life insurance policies

🚨 Example: A debtor didn’t list a pending $10,000 lawsuit. The trustee found out, and their bankruptcy was denied.

✅ What to Do Instead: Disclose everything to your attorney—they can help protect your assets legally.

6. Draining Retirement Accounts

401(k)s, IRAs, and most retirement accounts are protected in bankruptcy—but if you withdraw funds before filing, that money loses protection.

🚨 Example: A debtor cashes out a $15,000 401(k) to pay off debt, then files bankruptcy. That money would have been protected if left in the account.

✅ What to Do Instead: Do not withdraw from retirement accounts before speaking with a bankruptcy attorney.

7. Selling Assets Below Market Value

Selling an asset for less than it’s worth before filing can be reversed by the trustee.

🚨 Example: Selling a $20,000 car to a friend for $5,000 before filing is a problem. The trustee can undo the sale and take the car.

✅ What to Do Instead: Sell assets for fair market value and keep detailed records.

8. Depositing Large Sums Into Your Bank Account

Unusual large deposits into your bank account before filing can raise trustee scrutiny and scrutiny about the source of funds.

🚨 Example: You deposit $12,000 from a cash sale right before filing. The trustee assumes you’re hiding assets or a source of income.

✅ What to Do Instead: Keep detailed records of any large deposits and speak with a bankruptcy lawyer before making transactions.

9. Switching Banks Without a Plan

If you owe money to a bank, they can freeze your account once you file bankruptcy. Some banks, like Wells Fargo, will freeze your account when you file bankruptcy, even if you do not owe them any money.

🚨 Example: You have a checking account with XYZ credit union and a XYZ credit union credit card. After filing, XYZ credit union freezes your checking account.

✅ What to Do Instead: If you owe money to your bank, move your money to a new bank before filing. Talk to your attorney about which banks have policies of freezing bank accounts.

10. Filing Right Before Receiving a Windfall

If you’re expecting a tax refund, bonus, inheritance, or lawsuit settlement, it could become part of your bankruptcy estate.

✅ What to Do Instead: If possible, time your bankruptcy filing strategically to protect assets. Timing becomes important with assets; sometimes filing before getting the assets makes the most sense, while sometimes filing after getting the asset makes more sense. It is all fact specific.

11. Taking Out New Loans Before Filing

New loans before filing can be considered fraudulent borrowing and may not be discharged.

✅ What to Do Instead: Avoid new loans or credit applications before filing.

12. Ignoring Lawsuits or Judgments

If a creditor sues you, don’t ignore it. Bankruptcy can stop lawsuits, but a judgment can lead to wage garnishment.  You often have some time after a judgment before a creditor can start collecting, but it is limited.

✅ What to Do Instead: If you’re being sued, consult a bankruptcy lawyer immediately.

13. Moving Money to Someone Else’s Account

Transferring money to a spouse’s or child’s account before filing can look like you’re hiding assets.

✅ What to Do Instead: Keep all financial transactions transparent and avoid unnecessary transfers.

14. Ignoring Tax Debts or Failing to File Taxes

Certain older tax debts can be discharged in bankruptcy, but only if tax returns were filed at least two years before filing.

✅ What to Do Instead: File all missing tax returns before bankruptcy, even if you can’t pay.

15. Not Consulting a Bankruptcy Attorney Early Enough

Waiting too long or making uninformed financial moves can backfire. Talk to a bankruptcy lawyer as soon as you are worried about your debt. 

✅ What to Do Instead: Speak with an experienced Virginia bankruptcy attorney as soon as you think bankruptcy might be an option.

Final Thoughts: Protect Your Bankruptcy Case

Bankruptcy offers powerful debt relief, but making the wrong moves before filing can cause problems. The best way to protect yourself? Talk to a bankruptcy lawyer before making any major financial decisions.

👉 Considering Bankruptcy? Contact Ashley F. Morgan Law, PC Today! At Ashley F. Morgan Law, PC, we help Virginia residents navigate Chapter 7 and Chapter 13 bankruptcy while protecting their assets. Schedule a free consultation today to discuss your options!

📞 Call us at 703-880-4881