As a bankruptcy attorney, I seldom meet a client who does not have noble intentions of repaying their debts.  However, it is this noble attempt to repay debts that can often result in additional, and otherwise avoidable, financial trouble for the debtor.  The following are the most common missteps to avoid if you are experiencing financial difficulties:

1. “…when I realized that I couldn’t make my payments, I withdrew my retirement money.”

Raiding your retirement funds to pay debt that would otherwise be discharged in bankruptcy will result in a double penalty: one penalty for no longer having money to retire with, and a second penalty issued by the IRS at a rate of 40% of the amount withdrawn. Tax debt is often very difficult to discharge. Paying debt with retirement funds often turns a dischargeable debt into to a non-dischargeable tax liability.

The solution: If you have decided that it is necessary for you to withdraw money from your retirement account, you have likely reached the point that attempting to repay your debt is futile.  At that point, rather than reducing future income by withdrawing retirement funds, it is a much wiser business decision to simply discharge that debt through bankruptcy.

2. “I just had to pay my relatives back.”

Generally speaking, relatives are the first people you would like to see repaid in full. For that very reason, the bankruptcy code allows trustees to look back at payments that debtors have made to relatives in the one year prior filing bankruptcy, and file a lawsuit to recover those payments from the relative.

The solution: Some types of payments to relatives will not result in a lawsuit, but an experienced bankruptcy attorney must make a detailed analysis of the transaction to make that determination. An experienced bankruptcy attorney may also be able to keep your relative out of harm’s way by delaying the bankruptcy filing until after the 1 year look-back period, or by negotiating a settlement with the trustee for an amount that the debtor can pay over time.

3. “I’ve been working with a debt consolidation company. I paid them money up front, and I still got sued.”

The Government Accountability Office released a report in April 2010 in which they found that many debt settlement companies “provided fraudulent, deceptive or questionable information” such as claiming “unusually high success rates for their programs-as high as 100%” investigators typically found a success rate of less than 10%. Often times, debt settlement companies will require that you pay money into an account, while advising you to stop making payments to creditors. The money paid into the account is often used to pay the fee for the debt settlement company, while little to no money is paid on your outstanding debt. The result is that you may pay thousands of dollars to a debt settlement company and find yourself in the middle of lawsuit for unpaid debt. Many of these companies make claims that their services are connected to a government program.

The solution: The Bankruptcy Code is the only government debt relief program.

4. “I couldn’t pay the employment taxes on my small business because I had to pay my loyal suppliers.”

The IRS always comes absolutely first for payment of employment taxes.  If you fail to pay, you may be personally liable to the IRS, even if it was your business who was the employer. Even though you would rather pay the friendly vendor you have done business with for years, or maybe the obnoxious creditor who screams the loudest, you shouldn’t pay either of them at the expense of missing your employment tax deposits. You will absolutely end up paying twice.

If you or someone you know are currently experiencing financial difficulties, please contact Colin Linsenman or Peter Mooney at 810-235-9000 to discuss bankruptcy as one option to alleviate your financial hardships.