When Does it Make Sense to Delay Filing for Bankruptcy?
Many will tell you that you should never delay filing for bankruptcy and the logic behind this type of statement makes sense. If you know that you are buried in an amount of debt that you can’t conceivably recover from, delaying can only mean that the mountain of debt will have time to grow larger. But are there times when it does make sense to delay filing for bankruptcy? Are there certain situations in which it would be advantageous to file bankruptcy on a certain “timeline?” As they say…timing is everything and that old saying is just as true for when to file for bankruptcy.
In some situations it is most beneficial to file for bankruptcy as soon as possible. But under other circumstances, it is more advantageous to delay filing. When does it make sense to postpone or delay filing for bankruptcy?
When you have recently moved to another state
Every state has a set of bankruptcy exemptions determining how much property you can keep in Chapter 7 bankruptcy. In order to prevent debtors from temporarily moving to states in which they can most benefit from the bankruptcy laws regarding property retention, bankruptcy laws dictate minimum residency requirements. If you have recently moved, you would need to delay your bankruptcy filing if you want it to be filed under your new state of residency’s bankruptcy laws.
When waiting could make you eligible for a “cramdown”
When filing for Chapter 13, you can use a process known as a cramdown to decrease your interest rate and your auto loan balance. To qualify, your vehicle purchase must have taken place at least 910 days before your bankruptcy filing. If you can wait to file until you meet this minimum, it could be beneficial.
If you’ve just lost your job or received a drastic cut in pay
In order to qualify to file for Chapter 7 bankruptcy, you must pass the bankruptcy means test. It compares your average income for the 6 months prior to filing with the median income in your state for households of similar size. If your income falls below the median, you immediately pass the means test. If you’ve recently had a drastic decrease in pay, it could make sense to wait until your 6-month average income has dropped below that state median. It makes it easier to qualify for Chapter 7 bankruptcy filing.
If you hope to discharge income tax debts
Income tax debts are typically treated as exempt from bankruptcy. They aren’t dischargeable, but older income tax debts that satisfy certain requirements may be eligible for discharge. Potentially eligible income tax debts are those whose tax returns were due at least three years prior to your bankruptcy filing. There are additional conditions that must be considered, but timing could be important in this circumstance.
You are about to receive a tax refund
If you are about the receive a tax refund, it is most likely beneficial to delay filing until after you receive it and have a chance to spend it (on necessities like food, rent, gas, etc.) Tax refunds (already received or not) become the property of the bankruptcy estate and can be taken and used to distribute amongst your creditors.
You have recently paid a family back for a loan
If you recently paid a family member back for a loan you need to delay filing. Bankruptcy law prohibits you from giving any creditor preferential treatment over another. If you ignore this law and pay back a family member prior to filing for bankruptcy in order to avoid including them in your list of creditors, the trustee can take the money back and distribute it amongst your creditors. Generally speaking, this applies to any payments made to any “creditor” (family or not) within the 90 days preceding your bankruptcy filing date and to “insiders” specifically (like family members and business partners) for a full year preceding your bankruptcy filing date.
You have recent “new” charges on your credit card/s
If you purchased luxury items on credit within 90 days of filing for bankruptcy or obtained cash advances from credit cards within 70 days of filing for bankruptcy, those debts could be deemed non-dischargeable. The creditor doesn’t have to go to the trouble to prove bankruptcy fraud. If you have made this type of recent purchase or cash advance, it would probably be in your best interest to delay filing for bankruptcy.
You recently gave property away or transferred ownership of an asset
The bankruptcy trustee assigned to your case has the power to cancel property transfers made by debtors prior to their bankruptcy filing date in order to obtain the asset to benefit the creditors listed for discharge. This process is called a bankruptcy clawback. Generally speaking, the ability of the trustee to obtain sold, gifted or transferred property depends upon when it was done, how much the debtor received in exchange (if any), and whether or not the property transfer was fraudulent. If you have recently transferred, sold, gifted, etc. any asset you might benefit from delaying your bankruptcy filing simply to avoid this type of situation.
If you are unsure of the timing that would best suit your situation, please get in touch with the southern California bankruptcy experts at Westgate Law. We can help you to determine if your circumstances call for immediate action or if delaying your bankruptcy filing would be a good call.