I send new clients a checklist of items they need to help them complete the bankruptcy questionnaire and also to bring to our in-person meeting. But bankruptcy attorney Jennifer Weil recently posted an online list that's a great one to use even before you contact a bankruptcy attorney. You'll save yourself time and prevent delays in your case if you follow her advice. Click here to read her article.

1. You have to include all your debts in the bankruptcy petition and schedules. To fail to do so could result in not getting a bankruptcy discharge on any of your debts.

2. If the amount owed on that card is less than $600, you are allowed to pay it off prior to the filing of the petition and therefore not list it because there would be no debt. But the credit card company would probably cancel the account anyway after your bankruptcy. These days, credit card companies are taking a harder line than they used to. Therefore it doesn't make a lot of sense to use your scarce money to pay off that card.

3. After your bankruptcy discharge, you will probably get offers of new (low limit) credit cards. This is a good thing. Get one of those cards and use it to help rebuild your credit. Click here for an article about rebuilding your credit after bankruptcy.

1. That creates an $8,000 taxable event, which means that you have $8,000 additional taxable income.

2. You’ve just spent $2,000, you still have bad credit (actually, worse), and you still owe everything else including the additional income tax.

The moral of this story? Think very carefully before you start to negotiate debts with creditors. It might not be in your best interests to do so.

If you want to read the study itself, click here. You'll need to have Adobe Reader (or Adobe Acrobat) on your computer; to download Adobe Reader, click here.

- Get loans based on home equity. This is very dangerous. If your financial situation is not remedied, you will be less able to make the payments on the now-increased debt secured by your home. That makes losing your home more likely.

- Withdraw funds from IRAs or other qualified retirement plans. Funds in these plans are in general protected from creditors in a bankruptcy proceeding, so withdrawing the funds removes money you could have kept safe for your retirement or other uses following bankruptcy.

- Continue to make payments on debts for which there is no reasonable possibility of paying off. Do you really want to spend your last dollars in a hopeless effort to pay off your debts, leaving nothing left for you to keep for your fresh start if you do decide to file bankruptcy?

For the above reasons and more, you really should explore what options would be best for you by consulting a bankruptcy attorney when you feel that you're in serious financial trouble.

In that article, the author Jane Bryant Quinn says "Most families, honorable to the end, struggle longer than they should, says Katie Porter, a law professor at the University of Iowa. By the time they give in, they've lost assets they could have used to start over again. That defeats the point of bankruptcy—to stop the self-blame and hopelessness that goes with bad luck and bad bills, and give yourself a second chance."

It's a good, short, read and makes very good points. Here it is for you on the web: click here

Important addition: There's a comment on that Newsweek article by Pennsylvania bankruptcy attorney Charles Bierbach. He is also a bankruptcy trustee so he's "seen it all". He said:

My constant advice to my clients and to debtors who appear in front of me at Meetings of Creditors, is "think with your wallet"…  Borrowing from exempt assets, like retirement accounts and exemptable equity in your home, is a step backward. Get good legal advice about bankruptcy before you cash in everything you own, or before you throw good money after bad.

First, it is important to notice that it is likely that all of us were taught that good people pay their bills and debts and bad people don't, and that bankruptcy is a shameful thing. So what are we to do? Well, let's take a look at a few important points about this subject.

- It's important to note that you can always pay anyone you choose to pay following bankruptcy. You don't have to not pay anyone; it's up to you. If you've borrowed from a relative or friend, or have bills with local merchants, those are the type of debts that many people who go through bankruptcy choose to pay after that process is complete. It's all up to you.

- The economy of this country, and of the world, depends on credit and the use of credit. If you question this, just take a look at the present economic condition (2009) to get a real-life example of what happens when the credit available and in use is greatly reduced.

- When you get and use a credit card, you're contributing to the success of the merchant from whom you purchased something and also contibuting to the success of the bank that issued the credit card, making more money available for that bank to lend. This is not to say that many of us don't abuse our use of credit cards; it's just the simple statement that credit cards and their use are a very important part of our economy.

Now hear this #1… This very important part of our economic system has built into it, by definition, the probability that a certain percentage of credit card users will, either by their own hand or by outside circumstances, be unable to repay their credit card debt. That is simply a fact of life for this type of business.

Now hear this #2… The banks that issue credit cards know this and it is part of their cost of doing business.

Now hear this #3… Congress and the Supreme Court did not enact and interpret the bankruptcy laws just to "be nice" to people in debt. It's way more important than that. People who are candidates for bankruptcy are generally not fully participating in the economy due to their financial situation. Bankruptcy's Fresh Start gives them the "clear field for future effort" that allows them to once again fully participate and contribute to our economy. Our bankruptcy laws were enacted by our representatives for a very good public policy reason.

Finally… Whether you actually should file for bankruptcy is another issue, and one you should discuss with a bankruptcy attorney, but know that the opportunity to do so was provided for a very good reason for the benefit of all citizens, not just the ones who file bankruptcy.

Southern California attorney Carl Starrett published a blog article entitled 5 Signs That It May Be Time to File Bankruptcy.  What struck me about this list is that four of the five items show a lessening of quality of life, for example "losing sleep and suffer stress-related health problems because of their financial struggles".

Click the link directly below and read that article and see if it might be time for different priorities in your life.

5 Signs That It May Be Time to File Bankruptcy

The above article is mostly about quality of life issues. For a short discussion of basic financial considerations that might favor bankruptcy, and a link to the Newsweek magazine article that covers the issues, click here.

Banks that freeze your accounts when you file bankruptcy

Some banks, currently reported to be Wells Fargo and Union Bank, place a freeze on the accounts of anyone who files bankruptcy. The technical reason they do this is to preserve the assets in those accounts for the bankruptcy trustee to decide the disposition of those assets. You'll get the money back if it's not given to creditors in the bankruptcy process, but why go through the inconvenience or worse of not having access to that money.

Solution: Move your money out of those banks into another one before filing bankruptcy.

Banks and credit unions where you have both deposits and debts

Those institutions may claim a "set off" when you file bankruptcy and take the money from your deposits to pay the amount you owe them. This is a complex legal issue, and litigating costs money, so avoid the issue by moving your deposits out of institutions where you also have debts (credit cards, car loan, etc.). Actually, it's a good idea to do that anyway if you think that you're going to get behind in your payments to them, regardless of whether you're going to file bankruptcy.

Automatic withdrawals

The "automatic stay" of bankruptcy is supposed to stop all collection efforts, but automatic withdrawals to pay a debt might not stop for administrative reasons. Why go through the trouble and possible expense to get that money back when it's much easier to avoid the potential problem and simply stop all automatic withdrawals before filing bankruptcy.

If you're behind in your bills or behind in making credit card payments, and especially if you also have high credit card balances, your credit is already bad and will get worse if you don't do something to bring your accounts up to date. If you're not behind in making payments, you probably soon will be if you're considering filing bankruptcy (if you're reading this, I assume you're considering it) and your credit will move to "bad".  And, again, your credit will only get worse until you "fix" it some way.

Now, let's see what happens to your credit report after a bankruptcy.

- Late payments are removed.
- Unpaid debts are removed.
- High balances are removed.

That means your credit report is mostly "wiped clean". Instead of those items listed above, your accounts included in bankruptcy will be noted as "Included in Chapter 7 Bankruptcy" or "Included in Chapter 13 Wage Earner Plan," depending on which type of bankruptcy you filed (that's for another discussion and not important here). That "bankruptcy" note is not as harmful to your credit rating as those things that were removed.

Another important factor is that after you eliminate your debt in the bankruptcy, your debt-to-income ratio is greatly reduced and your credit score will increase as a result.

But one of the largest differences in this bankruptcy-or-not credit-rating comparison is that without bankruptcy your credit rating will probably continue to get worse, and after bankruptcy (only 3 to 3 1/2 months with Chapter 7) you can actively start to improve your credit rating. Here's the way it usually goes.

Credit card companies know that after you complete bankruptcy, you can't do that again for six or eight years (again, depending on the type of bankruptcy). Guess what that means to them? That you are a good prospect for a credit card! After bankruptcy, you will probably receive one or more offers for a credit card. Any credit card offer will probably be for a card with a very low limit, for example $300, and a high interest rate for balances, but THAT DOESN'T MATTER. Here's what you should do to start to improve your credit rating:

- Get that offered credit card.

- Use it ONLY for the purpose of rebuilding your credit, not (for example) to "carry" you to the next payday.

- Those "bad old days" are over and you must have a new relationship with your credit card. The purpose of your new credit card is not to help you finance your life, but instead ONLY to rebuild your credit.

- Use it at least once a month and then QUICKLY pay the balance IN FULL.

- Do not charge more than about one-fourth of the card's limit. One of the factors in a "credit score" is how close to the limit you are on a credit card, so don't get close. Keep it one-half-limit or lower, and one-fourth is better.

- Do not even get close to the time due for a payment before you pay off the balance in full, so there is no chance of being late.

Your regular use of the credit card, regular low balance, and never-late-for-a-payment history will result in an increasing credit rating. For example, it's common for people who couldn't get a car loan because of bad credit to be able to get one within one-to-two years after bankruptcy.

There's another important point here. Using the credit card only as described above will prevent you from falling victim to any number of "bad practices" of credit card companies. Raise your interest rate? No problem; you never incur any interest charges. Very high late charges? No problem; you're never close to being late. Add a large "over limit" fee because an interest charge puts you over the limit? Again, no problem because you (1) never have interest charges and (2) are never close to your card's limit.

I think you get the idea. Whether you should file for bankruptcy is quite another question, and one you should discuss with a bankruptcy attorney, but you probably shouldn't be afraid of its effect on your credit. It might actually be the best thing you could do for your credit.