What Not to Do Before Filing Chapter 7 Bankruptcy

Before you file for Chapter 7 bankruptcy, the wrong financial moves in the preceding weeks and months can cost you your discharge, get your case dismissed, or expose you to criminal charges. The trustee assigned to your case will look closely at your recent transactions, and specific rules in the bankruptcy code let them reverse transfers, block certain debts from being wiped out, and recommend prosecution for fraud. What not to do before filing Chapter 7 bankruptcy comes down to a handful of predictable mistakes, each with its own look-back window and its own penalty.

Don’t Inflate Your Income

Your income during the six months before filing decides whether you can use Chapter 7 at all. The means test compares that six-month average to the median income for a household your size in your state. Fall below the median and you qualify. Come in above it and you move to a second calculation involving allowed expenses, disposable income, and your unsecured debt. If the numbers show a presumption of abuse, the court will likely dismiss the case or push you into Chapter 13.¹

A one-time bump counts. If you take a large bonus, cash out stock options, or accept a lump-sum payout in the months before filing, those dollars land inside the six-month window and can push you over the median. Timing matters. If you know a windfall is coming, talk to a bankruptcy attorney about whether to file before or well after it hits your averages.

Don’t Transfer or Hide Property

Selling something to a relative for a dollar, deeding a car to a friend, or quietly moving cash into someone else’s name are among the fastest ways to blow up a Chapter 7. The trustee can reverse any transfer made within two years before filing if it was made to keep assets away from creditors or if you received less than fair value while insolvent.²

Two years is the federal floor. The trustee can also use state fraudulent transfer laws, which typically reach back four to six years, and when the IRS is a creditor the effective window can stretch further still.³ The property gets pulled back into the estate for distribution to creditors.

Losing the property is the mild outcome. The court can deny your discharge outright if you transferred, concealed, or destroyed property within a year before filing with intent to defraud creditors.⁴ Criminal bankruptcy fraud carries up to five years in federal prison and fines up to $250,000.⁵

If you’re worried about a specific asset, the answer is exemptions, not transfers. Federal exemptions include a $1,675 wildcard plus up to $15,800 of unused homestead exemption that can be applied to any property. Many states offer their own, sometimes more generous, exemption schemes.

Don’t Load Up on New Debt

Recent borrowing looks like borrowing you never planned to repay, and the bankruptcy code says so directly. Two presumptions apply:

Consumer debts to a single creditor for luxury goods or services totaling more than $900, incurred within 90 days before filing, are presumed nondischargeable.⁶
Cash advances totaling more than $1,250 within 70 days of filing carry the same presumption.⁶

Presumed nondischargeable means the debt survives your bankruptcy unless you can prove you genuinely intended to repay it when you borrowed. That’s a hard case to make when you filed a few weeks later. Groceries and medical costs are not luxury goods, so routine spending on necessities in this window is generally safe. A new TV, a vacation, or a shopping spree is not.⁷

Don’t Pay Off Family or Favored Creditors

Repaying a parent, a sibling, or a friend right before filing feels like the right thing to do. Bankruptcy law treats it as a preferential payment. The trustee can sue the person you paid and claw the money back, because all unsecured creditors of the same priority are supposed to share proportionally.

The look-back window is 90 days for ordinary creditors and one full year for insiders, meaning relatives, business partners, and anyone with a close personal or financial relationship.⁸ A family member who thought they were being repaid ends up on the receiving end of a lawsuit.

Regular payments on ongoing obligations are different. Keep paying your mortgage, car loan, and utility bills on schedule; those match the ordinary course of business and don’t raise the same problem. What draws scrutiny is a lump-sum payoff, an unusually large payment, or suddenly prioritizing someone you wouldn’t normally pay first.

Don’t Drain Your Retirement Accounts

This is one of the most expensive mistakes people make. Retirement accounts are already protected in bankruptcy. ERISA-qualified plans like 401(k)s and 403(b)s receive unlimited protection. Traditional and Roth IRAs are protected up to roughly $1,711,975, and rollover funds from an employer plan don’t count against that cap.⁹

When you withdraw retirement money to pay creditors, you turn protected savings into unprotected cash and hand it to people who would have collected nothing through a Chapter 7. You also owe income tax on the withdrawal, plus a 10% early withdrawal penalty if you’re under 59½. The debts you were trying to knock out could have been discharged for free. Leave the accounts alone until you’ve talked to a bankruptcy attorney.

Don’t Spend a Tax Refund the Wrong Way

A tax refund you’re owed at the time of filing is an asset of the bankruptcy estate. Cashing a large refund shortly before filing and then blowing it on luxuries, or handing it to a relative, gets treated the same way as any other improper transfer or preference.

Spending the refund on legitimate expenses is fine, and often smart. Rent, mortgage payments, utilities, groceries, medical bills, car insurance, and the costs of the bankruptcy itself, including attorney fees and the court filing fee, all count. Keep receipts. If the trustee asks where the money went, documentation showing basic living expenses ends the inquiry.

Don’t Leave Anything Off the Petition

Your Chapter 7 petition includes schedules of assets, income, expenses, debts, and recent financial transactions, all signed under penalty of perjury. Concealing property from the trustee, lying under oath in a bankruptcy case, or destroying financial records is a federal crime.¹⁰ Each offense carries up to five years in prison and fines up to $250,000.⁵

Even short of prosecution, the civil consequence is losing your discharge. The court can deny it entirely if you made a false oath, hid property, or couldn’t adequately explain a loss of assets.⁴ You’d finish the case still owing every dollar. Trustees compare schedules to tax returns, bank records, and public filings, and inconsistencies stand out. Disclose everything, including property you think is worthless, accounts you rarely use, and anyone who owes you money.

Don’t File Before Your Waiting Period Is Up

If you’ve had a bankruptcy discharge before, timing rules apply:

After a previous Chapter 7, you must wait eight years from the filing date of the earlier case, not the discharge date.⁴
After a previous Chapter 13, you must wait six years from the filing date. That period is waived if you paid 100% of unsecured claims in the Chapter 13 plan, or at least 70% while acting in good faith and making your best effort.¹¹

Filing too early doesn’t stop you from opening a case. It stops you from getting a discharge in that case. You’d go through the disclosure and examination, potentially lose property, and eliminate nothing. People trip on this by confusing filing dates with discharge dates or mixing up the rules for different chapters. Pull your prior case docket and check the filing date before you commit.

Don’t Skip the Required Counseling

Two separate courses are mandatory, and missing either one derails the case.

The first is a credit counseling session from a court-approved nonprofit, completed within 180 days before filing. Without the certificate, you can’t file. A narrow exception allows an emergency filing if you tried to get counseling and couldn’t within seven days, but you still need to complete it within 30 days after filing, with a possible 15-day extension for good cause.¹²

The second is a debtor education course, completed after filing but before discharge. Skip it and the court won’t grant your discharge, so all the work of filing produces nothing.¹³ Both courses usually cost between $5 and $50, fee waivers are available for filers below 150% of the federal poverty level, and most approved providers offer online or phone options that take about an hour.

1
Office of the Law Revision Counsel. 11 U.S. Code 707 – Dismissal of a Case or Conversion
2
Office of the Law Revision Counsel. 11 U.S. Code 548 – Fraudulent Transfers and Obligations
3
Harvard Law School Bankruptcy Roundtable. Another Court Adopts Majority View in Approving Bankruptcy Trustees Use of Tax Code Look-Back Period in Avoidance Actions
4
Office of the Law Revision Counsel. 11 U.S. Code 727 – Discharge
5
Legal Information Institute. Bankruptcy Fraud
6
Federal Register. Adjustment of Certain Dollar Amounts Applicable to Bankruptcy Cases
7
Office of the Law Revision Counsel. 11 U.S. Code 523 – Exceptions to Discharge
8
Office of the Law Revision Counsel. 11 U.S. Code 547 – Preferences
9
Office of the Law Revision Counsel. 11 U.S. Code 522 – Exemptions
10
Office of the Law Revision Counsel. 18 U.S. Code 152 – Concealment of Assets, False Oaths and Claims, Bribery
11
United States Courts. Discharge in Bankruptcy – Bankruptcy Basics
12
Office of the Law Revision Counsel. 11 U.S. Code 109 – Who May Be a Debtor
13
United States Courts. Credit Counseling and Debtor Education Courses