There are times when filing bankruptcy as soon as possible is best, but, there are other times when it may be a good idea to delay the filing. This article will explore some of the circumstances that may justify filing for bankruptcy right away and some of the circumstances that may warrant a delay.
There are times when filing bankruptcy as soon as possible may be the only viable solution to an individual’s financial problems. However, there are other times when it may be a good idea to delay filing bankruptcy for various reasons. This article will explore some of the circumstances that may justify filing for bankruptcy right away and some of the circumstances that may warrant a delay.
When Is It A Good Idea To Delay Filing For Bankruptcy?
Bankruptcy offers many benefits, such as the protection afforded by the automatic stay, and can lead to a fresh start. You may find debt relief by filing a Chapter 7 bankruptcy case if you qualify under the Chapter 7 means test, or you can propose a 3-5 year repayment plan through a Chapter 13 bankruptcy filing.
Filing for Chapter 7 bankruptcy can be a great option for those who are eligible based on their average income. However, it’s important to keep a few things in mind before you commit to filing your case. For example, you should know that while your case is open, any non-exempt assets that you receive may become part of your bankruptcy estate and sold to pay off your unsecured creditors. When you file bankruptcy, a temporary artificial entity known as a bankruptcy estate is created by federal law. This estate contains all of your property. Any non-exempt property in the bankruptcy estate is subject to being sold by the Chapter 7 trustee assigned to your case. The proceeds of the sale of your non-exempt property are distributed to your unsecured creditors. While most Chapter 7 filers don’t have many non-exempt assets, it’s important to know that this is how the process works, in case you own unusually valuable property and you have concerns about how it will be treated during bankruptcy.
Any of your property that is exempt is protected from being sold by the trustee assigned to your case, which means that you will continue to own it outright. Any bankruptcy filing allows the filer to claim bankruptcy exemptions to exempt or exclude property from his or her bankruptcy estate. One way to put yourself in the best position possible before filing bankruptcy is to maximize the amount of exempt property that you own and therefore get to keep after you receive your bankruptcy discharge.
There are other considerations for timing your bankruptcy filing. Once you file a bankruptcy case, your assigned trustee will scrutinize your recent financial activities. Certain financial transfers involving money and property could affect you negatively or even be nullified by the court if they occurred too soon before you filed your bankruptcy petition. You may also experience difficulties if you use a credit card to receive cash advances or purchase what may be considered luxury goods too soon before a case. Even receiving an income tax refund too soon before or after filing may cause you to forfeit it. Obtaining legal advice about the timing of your bankruptcy filing by consulting with a bankruptcy attorney may be necessary to ensure that your case is successful.
You Recently Bought or Sold a House, or You Are Trying to Refinance Your Mortgage
Any change in circumstance related to purchasing or selling a home before filing bankruptcy (or during an active bankruptcy filing) may change the amount of cash that you have in hand or result in equity that is non-exempt. While most states provide a homestead exemption, this equity may exceed the amount of the exemption, since the increase would be diverted to paying your unsecured creditors. Buying, selling, or refinancing after filing bankruptcy may be difficult since any of these actions must be approved by your trustee and the judge assigned to your bankruptcy case.
You Recently Paid Off a Debt, or Gave Money to Family or Friends
Another reason to delay filing bankruptcy under Chapter 7 involves payments made to creditors, family, or friends in the 12 months before you’ve filed for bankruptcy. These types of transactions or preferential payments are known as preferences. These are transfers made before a bankruptcy case to creditors or loved ones that potentially allow them to receive more than they would rightfully recover in the bankruptcy case.
The trustee will look for preferences (made in the 12 months before you filed bankruptcy) for payments made to friends and family, known as “insiders.” The preference period for a debt paid to non-insiders (creditors who aren’t family members or friends) is 90 days before the bankruptcy petition is filed. The policy behind disallowing preferences better ensures that your unsecured creditors will be treated fairly and equally, not only after a bankruptcy filing but immediately before. If you make a transfer that would be considered a preference in a bankruptcy case, it’s only logical to postpone the bankruptcy filing to avoid the preference rule from coming into effect. Otherwise, if you do not postpone filing bankruptcy, the bankruptcy trustee will seek recovery of any monies paid to family members (insiders) and even ordinary creditors (non-insiders), thus depriving them of the benefit of your payment.
You’re Expecting a Large Tax Return, Stimulus Check, or Inheritance in the Near Future
If you’re expecting a windfall in the near future (just before filing bankruptcy or soon thereafter) consider that a sum of money, like that from an income tax refund or stimulus check, may put a substantial amount of cash in your hands. Unless it’s only for a hundred dollars or so, this cash on hand will likely be treated as non-exempt property. As a result, it could be included in your bankruptcy estate for distribution to creditors. You may be able to navigate this challenge by using the funds to buy necessary items like food or clothing, or a new stove, since this property would likely fall under an exemption. Buying luxury goods with these funds is a bad idea since your purchases would be considered non-exempt property and sold by the trustee.
If you receive or are expecting to receive an inheritance, consider that any inheritance received within 180 days of your bankruptcy filing becomes part of your bankruptcy estate in both Chapter 7 and Chapter 13 cases. The Bankruptcy Code requires that any inheritance you become entitled to receive in the 180 days after filing bankruptcy must be turned over to the bankruptcy trustee for distribution to your creditors.
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When Is Delaying Your Bankruptcy Filing a Bad Idea?
While bankruptcy offers a fresh start and many other significant advantages, it represents a big step in your life. The reasons for waiting to file bankruptcy usually involve certain events that may have happened in the recent past. They can involve transfers that you make just a few months before a bankruptcy filing, or up to a year before. However, if the event involves a transfer that you receive, like an inheritance, stimulus check, or tax refund, and you are experiencing financial hardship, you must balance the likelihood of it happening with your need to find debt relief by filing a Chapter 7 bankruptcy case. If it is speculative and there is no guarantee that it will take place, this isn’t a good reason to delay.
Additionally, if you are the subject of excessive creditor harassment, the automatic stay will provide instant relief as soon as you file a petition with the bankruptcy court. You will be protected from any more contact by a collection agency or an original creditor. You can’t be charged any more interest or late fees on any credit card debt. Any wage garnishment will stop. No person should feel afraid of or guilty about filing bankruptcy. It’s not immoral or wrong to get relief under Chapter 7 or Chapter 13. Too often, hard working and responsible individuals find themselves in financial trouble through no fault of their own and the law acknowledges this. Bankruptcy relief exists for a reason. There is no shame in seeking bankruptcy protection when you need it.
Timing is everything in many aspects of life, including filing bankruptcy. To get the most out of a bankruptcy filing, it’s important to consider any transfer that you make that could be considered a preferential transfer. It’s also important to consider any windfall or transfer that you receive, such as a COVID-19 stimulus check, that could be considered part of your bankruptcy estate and distributed to creditors. If you are unsure about whether it’s the right time to file because of a transfer that could be considered a preference or any other issue that could arise in your bankruptcy case, you should consider speaking with a local bankruptcy law firm that offers free consultations. Alternatively, Upsolve can help you file a Chapter 7 bankruptcy case on your own.