Should I File Bankruptcy Now or Wait?

by Attorney Stephen R. Elias

Timing a bankruptcy filing wisely can have a significant impact on your future.

While you may have pressing reasons to consider filing for bankruptcy now, in some situations you may want to wait to file, even if you are eligible for Chapter 7 bankruptcy. If you face an immediate problem that bankruptcy can at least temporarily alleviate, such as a wage garnishment, foreclosure, judgment lien on your home, or car repossession, you may need to file for bankruptcy right away. But here are several situations in which delaying a bankruptcy filing can make sense.

If You Have an Opportunity to Modify Your Mortgage

These days, many people file for bankruptcy to delay a foreclosure. While bankruptcy can be a good solution in this situation, many people file much earlier than they need to, which makes it more difficult to obtain a mortgage modification. Once you file for bankruptcy, many lenders will refuse to enter into or continue negotiations over your mortgage. Because your bankruptcy will cancel the promissory note part of your mortgage (but not the lien on the house), technically there will be nothing left to negotiate. If you might want to seek a mortgage modification in the future, you probably should avoid bankruptcy - at least until you know which way the modification winds are blowing.

If Your Recent Income Has Been High

When you file for Chapter 7 bankruptcy, the court will look at your income over the past six months to determine whether you are eligible, using what's called the "means test." If your income is too high, you may file only for Chapter 13 bankruptcy, which requires you to repay a portion of your debts.

If your income has dipped recently because of a pay cut or layoff, you can often become eligible for Chapter 7 by simply waiting a few months. Once several months of decreased income are figured into the means test, your average income over the past six months may be low enough to qualify.

For example, assume that your average gross income for the previous six months is $8,000 per month, but that you were just laid off and are now getting $1,500 per month in unemployment. If you wait two months to file, your six-month average gross income will drop from $8,000 to less than $5,900 a month, which will bring you into eligibility for Chapter 7 bankruptcy in most states.

If You Have Property You Don't Want to Lose

You may have property that you would lose in a Chapter 7 bankruptcy if you file now, but that you could keep if you wait - or at least have time to sell and use the proceeds. For example:

  • Assume you are expecting a tax refund of $4,000. You would have to surrender it to the bankruptcy trustee if you receive it after you file. However, if you first get your tax refund, spend it over a few months on necessities, and then file for bankruptcy, you would have the full benefit of the refund.
  • Assume you have assets that are worth more than the amount you're allowed to keep in bankruptcy through "property exemptions." If you wait a few months to file, the property could sufficiently depreciate in value to fall within a property exemption. For instance, say you own a car worth $6,000 but your state exemption laws allow you to keep a car with a value only up to $5,500. If you wait a few months, the car's value could drop by enough to bring it within the exemption.
  • Assume that you have assets that aren't exempt - that is, the bankruptcy trustee can take the property and sell it to pay off your creditors. (Items other than your house, car, household goods, clothing, and other necessities are often nonexempt.) If you sell the property for its fair market value before you file for bankruptcy, and then spend the proceeds on necessities, you, rather than your creditors, would benefit from the property. (Or, you might be able to use the proceeds to buy property that is exempt from being sold in bankruptcy, such as a burial plot or a vehicle-but talk to a lawyer before you try this one, it could get you in trouble in some circumstances.)

If You Anticipate Having New Debts Soon

It's a good idea to hold off on filing for bankruptcy if you foresee other significant expenses in the near future. As a general rule, Chapter 7 bankruptcy only erases debts you have as of your filing date. Debts that come along later will be yours to deal with, sometimes for years to come. For example, if you will be having knee replacement surgery in the next year and you will have to pay some or all of the expenses, those expenses will be wiped out if you wait to file for Chapter 7 bankruptcy until after your surgery.

If You've Incurred New Debt or Transferred Property Recently

Certain payments and transfers that you make before filing bankruptcy cannot be undone in bankruptcy, and may even jeopardize the bankruptcy itself. Here are the most common issues to watch for:

  • If you charge more than $550 in luxury goods or services on any one credit card within 90 days of filing for bankruptcy, the court can presume that you made the charges fraudulently - that is, that you never intended to repay the credit card company. If this happens, the charges would survive your bankruptcy instead of being wiped out with your other debt.
  • Likewise, if you run up cash advances totaling $825 or more on any one credit card within 70 days of filing for bankruptcy, the cash advances can be considered fraudulent and can survive your bankruptcy.
  • If you pay more than $600 to a commercial creditor within 90 days of filing for bankruptcy - or to a relative or business associate within a year of filing for bankruptcy - the bankruptcy trustee can take the money back ("recapture" it, in bankruptcy lingo) and distribute it to your creditors.
  • If you've transferred any type of property to others within the past two years, either by giving it away or selling it for less than it was worth, the bankruptcy trustee can take it back and distribute it to your creditors. (unless it fits within a property exemption). The trustee can even challenge your right to a bankruptcy discharge if it can prove that you transferred the property to try to hide if from the bankruptcy court.

By waiting until these various time periods are over, you avoid the risk that these debts might survive - or even sabotage - your bankruptcy filing.

If You Can't Make Your Installment Debt Payments

A surprising number of people start thinking about bankruptcy when they fall behind on their credit card payments. Some people who are unfamiliar with our legal system believe they will go to jail if they stop paying. Not true. Furthermore, most creditors, including credit card companies, banks, and medical-care providers, can't go after your wages, bank account, or home unless they first sue you in court and win.

Suing you takes time and money, and not all creditors are willing to take this step. If a creditor does sue you, you'll be personally served with a summons and complaint, after which you'll typically have 30 days to file a simple response that denies the allegations and makes the creditor prove its case at a trial months or even years down the road.

Because of the potential expense involved in bringing a lawsuit, many creditors instead will declare the debt as "uncollectible" and write it off on their taxes. If you don't own real estate and have few assets that could be seized, or you are unemployed or receiving Social Security, this is likely to happen in your case. In other words, while bankruptcy can get rid of most debts, you may be able to just stop making your payments without any consequences (except lowering your credit score), and save the bankruptcy fees. If a creditor does sue you later and win, and you have assets or income to lose, you can always file bankruptcy to get the debt wiped out.

If You Just Want to Stop Collections

Probably the most common reason people think of filing for bankruptcy is to put an end to the blizzard of telephone calls that comes your way once you stop paying on your credit card or other installment debts. While a bankruptcy filing provides a quick solution to this problem, so does a federal law called the Fair Debt Collection Practices Act (FDCPA). The FDCPA (Title 15 U.S.C. Section 1692c) and the laws of many states require creditors and collection agencies to stop calling you at your home or workplace if you ask them to. Or, as one judge of my acquaintance recently told a bankruptcy filer, "If you don't want your creditors calling you, change your number."

If You Need Help Deciding

It's not always easy to weigh the pros and cons of filing for bankruptcy against the consequences of waiting it out. Speaking to an experienced bankruptcy attorney can help you sort out your options.