10 Bankruptcy Mistakes to Avoid (And How to File the Right Way)

Bankruptcy is a powerful tool for getting out of debt and rebuilding your life—but if you don’t file the right way, you could lose money, property, or even your chance at a fresh start. Avoiding the most common bankruptcy mistakes helps ensure you have a seamless process.

At Ashley F. Morgan Law, PC, we’ve helped thousands of people across Virginia navigate bankruptcy successfully. Here are 10 of the most common mistakes we see—and how to avoid them. With the right planning, you can come out stronger than ever.

1. Not Understanding Bankruptcy Exemptions (Especially in Virginia)

One of the biggest myths about bankruptcy is that you’ll lose everything. In reality, exemptions are legal protections that allow you to keep many assets. These exemptions vary by state—and using them correctly can be the difference between losing and keeping your home, car, or savings.

Common Mistakes:

• Not applying exemptions properly due to DIY filing or generic national advice

• Choosing the wrong set of state or federal exemptions (especially after moving)

• Failing to disclose exempt assets—thinking they’ll be hidden or ignored

Virginia-Specific Info:

• Homestead Exemption: Up to $50,000 per person (as of July 2024) to protect equity in real estate or other property.

• Wildcard Exemption: $5,000 (with more for seniors or disabled veterans) usable on anything.

• Car Exemption: Up to $10,000 in vehicle equity.

• Tools of the Trade: Up to $10,000 in business or work-related items.

• Tenants by the Entirety Protection: Married couples in Virginia with no joint unsecured debt can possibly protect jointly owned real estate and bank accounts.

Important Note: Virginia no longer requires filing a homestead deed in bankruptcy—but you still need to properly list and disclose assets to apply exemptions.

2. Racking Up Debt Before Filing

Some people continue using credit cards, take out loans, or make balance transfers shortly before filing—hoping those debts will be wiped out. But bankruptcy courts presume certain recent debts are non-dischargeable and may require you to repay them.

Examples of Problematic Debts:

• Cash advances over $1,100 within 70 days before filing

• Luxury goods or services over $800 within 90 days

• Transferring balances to a new card weeks before filing

These debts can trigger lawsuits from creditors and may result in nondischargeable judgments. Even if the creditor doesn’t sue, the trustee might raise questions about your intent.

How to avoid it: As soon as you consider bankruptcy, stop using credit and speak to a lawyer about your recent financial activity.

3. Transferring or Gifting Assets Before Filing

People often think they can protect property by transferring it to a family member or selling it for $1. This is one of the fastest ways to cause problems in your bankruptcy. Avoiding transferring any assets before filing bankruptcy is usually recommended, but speak to your attorney, if you are selling anything.

Why This Is a Big Problem:

• Trustees can undo transfers made within 2–5 years

• You may lose your discharge for intentional fraud

• Courts may deny your entire case if you’re caught hiding assets

Example:
A client transferred a house into their kids’ names that originally belonged to their late father. Even though it was done years ago, they didn’t disclose it in their bankruptcy filing. The trustee viewed it as a fraudulent transfer—and the court almost denied their discharge.

What to do instead: Always disclose everything, even past gifts or transfers. A good lawyer can often find a legal way to protect it using exemptions—without needing to hide anything.

4. Paying Back Family and Friends Before Filing

It’s natural to want to pay back someone close to you—but in bankruptcy, repaying an “insider” before filing can cause real problems.

What Happens:

• Payments to insiders within 1 year of filing can be clawed back by the trustee

• This can hurt the person you tried to help

• It can delay or complicate your case

Example: A client repaid her mother $10,000 just months before filing. After consulting us, her mother re-loaned the funds as “new value,” and we helped document it properly. After filing, she repaid her mother the right way—without risking clawback.

5. Filing at the Wrong Time

Timing your bankruptcy is critical—especially if your income changes month to month, or if you owe tax debt.

Why Timing Matters:

• Chapter 7 eligibility uses the last 6 months of income

• A recent bonus or overtime can disqualify you—even if your income is lower now

• Tax debt may only be dischargeable if:

  • It’s income tax

  • It’s at least 3 years old

  • You filed the return at least 2 years ago

  • The IRS assessed the tax more than 240 days ago

Example: In 2020, the IRS extended the filing deadline for 2019 taxes to July 15. We helped a client wait to file until exactly 3 years after that date so they could discharge $24,000 in federal income tax debt. Filing after the normal tax deadline would result in the taxes remaining after bankruptcy.

What to do: Work with an attorney who understands income lookbacks and tax timing rules. Filing just a few months too early can make all the difference.

6. Leaving Out Debts or Assets

Some people forget about old medical bills, debts in collections, or digital accounts like Venmo or PayPal. Others leave out assets they think aren’t valuable—like a potential lawsuit, crypto, or inheritance rights. Similarly, people believe they can exclude certain debts that they want to keep, like a specific credit card or their mortgage; but, it is critical to understand all debts and assets must be listed.

Why It Matters:

• Omissions can cause your case to be dismissed

• You may lose the chance to discharge certain debts

• You could even be accused of fraud

Pro Tip: Save every bill, letter, or collection notice. And list everything you own or could own, including:

• Crypto and NFTs

• Rights to sue (like a car accident claim)

• Uncashed checks

• PayPal, Venmo, and CashApp balances

• Life insurance policies with value

• Past due child or spousal support owed to you

7. Filing Without a Bankruptcy Attorney

Bankruptcy is a legal process—not just paperwork. Filing without a lawyer increases the risk of:

• Losing property you could have protected

• Getting your case dismissed for errors

• Missing key deadlines or failing the means test

What you miss without a lawyer:

• Exemption planning

• Strategic timing

• Proper treatment of tax debt, car loans, and home equity

• Dealing with trustees, creditors, and court procedures

Virginia-Specific Tip: Our office often helps clients qualify for Chapter 7 after other attorneys said they made too much money. We understand how to calculate income and expenses properly, especially in high-cost areas like Northern Virginia.

8. Believing Bankruptcy Will Ruin Your Life

Many people think bankruptcy means the end of their credit, homeownership, or financial future. That’s simply not true.

What Really Happens:

• Most clients see a credit score increase within 6–12 months

• You can qualify for a car loan with a good interest rate within 1 year and a mortgage within 2–3 years

• Retirement accounts are often fully protected

• You can rebuild your credit with secured cards and smart financial habits

Success Story: A married couple came to us with scores in the low 500s, behind on credit cards. Within 6 months of discharge, they were in the low 600s. Within 2 years, they bought a home with a score over 700—and no more credit card debt.

9. Not Switching Banks Before Filing (If You Owe the Bank)

If you owe money to your current bank—on a credit card, loan, or overdraft—they may take money from your account once you file.

What to do:

• Open a new checking account at a bank you don’t owe money to

• Move your direct deposit and automatic payments

• Do this before filing to prevent freezes or “setoffs”

10. Using Debt Settlement Companies Instead of Filing Bankruptcy

Many debt settlement companies promise to settle your debts for “pennies on the dollar”—but most leave clients worse off than before. This tends to be a common mistake since debt settlement programs are more costly than bankruptcy, have a more negative impact on your credit, and often fail. Too often, our office helps people file bankruptcy after their debts settlement process failed.

Risks of Debt Settlement:

• Creditors can still sue or garnish while you’re making payments

• You may settle one debt while others grow

• You’ll often owe taxes on forgiven debt via a 1099-C

• Settlement companies charge high fees, often 15–25% of the original debt

Example: A client owed $40,000 in credit cards. A debt settlement company got settlements for $25,000—but charged a $8,000 fee. Plus, the client owed taxes on $15,000 in forgiven debt.

Plan Smart, File Right, and Rebuild with Confidence

Bankruptcy is a tool, not a failure. When you avoid these common mistakes, you protect your assets, reduce stress, and create a real plan to get back on track. Avoiding common bankruptcy mistakes is the first step in having a successful bankruptcy case.

At Ashley F. Morgan Law, PC, we offer free consultations to review your situation and help you make the best decision. Whether you’re in Northern Virginia or exploring your options nationally, we’re here to guide you every step of the way.

Need Help? Schedule your free consultation today.

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• 50 Questions to Ask a Bankruptcy Attorney Before Hiring Them

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