If you are going to declare bankruptcy, here is a list of thing you should do beforehand. It seems counter-intuitive for a millionaire to talk about bankruptcy, but the millionaire’s riches are a target for litigation.

Bankruptcy is a powerful tool that can discharge personal liability while protecting personal assets.

Most of us never consider bankruptcy in our financial planning. When financial disaster strikes, your first stop should be with bankruptcy counsel.

Your bankruptcy attorney will instruct you on how to alter your spending and avoid certain financial transactions that can complicate a bankruptcy case.

Let’s take a look at the top five activities to avoid before you file bankruptcy.

#1 – Stop using credit cards

Continuing to charge on your credit cards when you are insolvent can lead to serious complications in your bankruptcy case.

Using credit with no intention to repay the debt is fraud, and you could be charged with a crime! When a debtor has gone on a spending spree immediately before bankruptcy, the Bankruptcy Code allows the creditor to object to the discharge of the debt.

In fact, charges within 90 days of the bankruptcy filing are presumed non-dischargeable, and you may be stuck paying the debt after bankruptcy.

Avoid It! Consult with your bankruptcy attorney before using a credit card convenience check, transferring a credit card balance, taking a cash advance, or going on a shopping spree with your available credit.

#2 – Avoid transferring property

The Bankruptcy Code requires all debtors to disclose transfers of property made just before filing bankruptcy. The bankruptcy trustee will investigate these transfers and will always presume a fraudulent intent.

For example, suppose a debtor is on the losing end of a $500,000 personal injury lawsuit for negligence. Fearing that the creditor will take his home, he quickly sells his home to his mother for $10, and then he files for bankruptcy protection.

In our example, the bankruptcy trustee can “avoid” this illegal transfer and return the property to the bankruptcy estate. You might then ask, “But what if the property is exempt? He gets to assert his exemption and keep the house, right?”

Most bankruptcy courts have rejected this “No harm, no foul” argument. The trustee can take the asset and sell it, and the debtor loses any right to exemption.

Avoid It! If you want to sell or transfer property, speak with your bankruptcy attorney. Your attorney can show you the right way to transfer the property without causing a legal mess.

#3 – Don’t repay loans to friends or family

Money paid to family or friends within a year of bankruptcy filing is presumed preferential and may be avoided by the trustee. In plain English, this means that the Bankruptcy Code presumes that you paid your family or friends instead of your other creditors.

The trustee can sue either you or your friend or family member (called “insider creditors”) and have that money returned for equal distribution among your creditors.

For instance, say you repay a $2,000 personal loan to your mother from your income tax refund just before filing bankruptcy. The trustee may be able to force your mother to turn over the $2,000 during your bankruptcy.

Avoid It! While there are several legal defenses to preferential transfers, it is always best to avoid any payments to friends or family before filing bankruptcy.

If you have been making payments on a debt to an insider creditor, speak with your bankruptcy attorney about your options.

#4 – Don’t pay more than $600 to one creditor

Preference payments are not limited to insider creditors. Payments that exceed $600 to any one creditor within the 90 day period before bankruptcy filing can be avoided by the trustee.

The Bankruptcy Code presumes that while you where insolvent you unfairly preferred to pay this creditor instead of other creditors. Avoided preference payments often create relationship problems between the debtor and the paid creditors.

Avoid It! Seek legal advice early and follow your attorney’s advice regarding who and what to pay before filing bankruptcy.

#5 – Don’t cash out your retirement

Nearly all retirement plans including 401k funds are fully protected by bankruptcy law.

Since neither the trustee nor your creditors can touch these funds, it makes little sense to take money from your retirement to pay creditors prior to bankruptcy. Even paying off secured debts can create equity issues and convert protected retirement assets into unprotected equity.

Avoid It! Speak with your bankruptcy attorney before moving assets, especially retirement funds. Bankruptcy laws are full of traps for the unwary and what is ordinarily good financial advice can spell disaster in bankruptcy.

An experienced bankruptcy attorney can help you avoid common bankruptcy traps. Feel free to leave your thoughts or comments below.