In a bankruptcy case, you'll list your income, debt, and property. If you've recently experienced changes to any of these, you may want to delay your filing to avoid negative consequences. Changes could include continuing to accumulate debt, a change in income, selling a piece of property, or getting an inheritance. Only you can decide the best time to file bankruptcy, but if you've experienced any of these or other events listed in this article, you may want to consider waiting to file so you can get the most out of your bankruptcy discharge.
Written by Attorney Jenni Klock Morel.
Updated June 24, 2022
Bankruptcy offers many benefits, such as the protection of the automatic stay and the ability to get a fresh start. In some cases, filing bankruptcy as soon as possible may be the best way to address your debt and financial problems. But other times, it’s better to wait to file bankruptcy so you can get your details in order. 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 Your Bankruptcy Filing?
Bankruptcy offers a fresh start and has many advantages, but in some cases, filing for bankruptcy might cause more problems than it solves. Many people who choose to wait to file bankruptcy have had certain events happen in the recent past that may put their property or assets at risk in bankruptcy.
When you decide to file for bankruptcy, you’ll want think about your income, debt, and property. If there have been big changes to any of these things in the recent past, you may want to delay your filing so you don’t experience negative consequences. If you haven’t experienced any of these events, the time may be right to file now, but only you can decide the best timing for your filing.
Events that might warrant a delay in filing your case could include:
You’re still taking on new debt.
You have property you want to keep that’s not protected by bankruptcy exemptions.
You recently bought or sold assets or property or you’re trying to refinance your home.
You recently experienced a significant change in income.
You’ve recently transferred property, paid off a debt, or given money to family or friends.
You expect to get an inheritance or a large amount of money soon.
You have tax debt that isn’t old enough to be discharged by a bankruptcy yet.
Your recent financial activities might damage your bankruptcy case.
Here are some things to consider while you decide whether to file your bankruptcy immediately or delay a bit to put yourself in a better position.
You’re Still Taking On New Debt
Debts you have before you file bankruptcy can be discharged or wiped out in the bankruptcy. But debts you incur after you file for bankruptcy can’t be discharged through your pending case. You have to pay them back. Also, it’s considered bankruptcy fraud to take out debt with the intention to erase it in bankruptcy. If you’re no longer taking on new debts, then it might be the right time for you to file bankruptcy. If you’re still accruing debt for ongoing medical care, for example, you might want to wait to file so you can include those medical bills in your bankruptcy case.
You Have Property or Belongings That Aren’t Protected
When you file bankruptcy, a temporary artificial entity known as a bankruptcy estate is created by federal law. This estate is made up of all of your property, including your home, car, certain household goods, and more. In most Chapter 7 cases, all of a filer’s property is protected by bankruptcy exemptions. If you own property that isn’t protected by an exemption, it’s called a non-exempt asset.
The trustee in your case can sell any non-exempt assets or property in your bankruptcy estate. The proceeds of the sale of your non-exempt property are distributed to your unsecured creditors. Though the majority of Chapter 7 cases are no-asset cases, it’s important to know that this is how the process works. If you own unusually valuable property and you have concerns about how it will be treated during bankruptcy, you may want to consult with a bankruptcy attorney before filing. Most offer a free consultation.
You Recently Bought or Sold a House or You’re Trying To Refinance Your Mortgage
If you purchase or sell a home soon before filing bankruptcy (or during an active bankruptcy filing) that can change the amount of cash that you have in hand or result in non-exempt equity. Most states have a homestead exemption, but if your home equity exceeds the exemption, the non-exempt portion can be used to pay your unsecured creditors.
Many people who are struggling to make their monthly mortgage payments and want to refinance or apply for a mortgage modification decide to hold off on filing bankruptcy until that’s sorted. That’s because once you file a bankruptcy case, mortgage lenders aren’t usually willing to work with you on changing the terms of your loan.
Your Income Recently Changed
To apply for Chapter 7 bankruptcy, you need to pass the means test. This test looks at your average income over the last six months. If your income is too high and you don’t pass the means test, you may not qualify for Chapter 7. This is why you want to time your filing well if you experience a change in income.
Here are two common scenarios:
You were working a high-income job but you lost your job in recent months. In this case, the decrease in your income may help you to qualify for Chapter 7. Many people who didn’t previously qualify for Chapter 7 bankruptcy can qualify after not having income for a few months. You may have to wait to file for a few months after losing your income to be eligible for Chapter 7 bankruptcy relief.
You recently got hired with a higher salary than before. In this case, it may be best to file sooner than later. That’s because your new salary will soon become part of the six-month look-back period.
You Recently Transferred Property, Paid Off a Debt, or Gave Money to Family or Friends
Once you file bankruptcy, the trustee for your case will look over your recent financial activities. This includes any property you’ve sold or given away in the past two years. These transactions are called transfers. In bankruptcy proceedings, there are several rules around transfers that have happened in the two years before you filed your case. To learn more, read our article “What Happens if I Transfer Property Before Filing Bankruptcy?”
You’ll also want to look at any recent payments you’ve made to creditors, family, or friends. These types of transactions are called preferential payments.
The trustee will check to see if you made any preferential payments of $600 or more to friends and family — known as “insiders” — in the year before you filed bankruptcy. The trustee will also look at any payments you’ve made to creditors who aren’t family members or friends in the 90 days before your bankruptcy petition filing. The bankruptcy court considers preferential payments to make sure that all your creditors are treated fairly during the bankruptcy process.
If you have made a preferential payment within the above timeline, you can still file a bankruptcy case, but the trustee in your case can recover the money you paid and redistribute it among your creditors. That’s why some folks who’ve made preferential payments choose to wait to file bankruptcy until after the relevant time period for such payments has passed.
You’re Expecting a Large Tax Return, Stimulus Check, or Inheritance in the Near Future
The cash you have on hand when you file bankruptcy can be treated as non-exempt property if it’s not protected by an exemption. As a result, the trustee can include it in your bankruptcy estate and distibute it to your creditors. This is why you’ll want to consider the timing of your bankruptcy filing if you’re expecting to get or be entitled to a large sum of money (more than $100) soon. This windfall could come in the form of an inheritance, tax return, stimulus check, insurance payout, or more.
If you are expecting a payment of some kind soon, this doesn’t mean you can’t file bankruptcy. You’ll just want to be careful with what you do with the funds. For example, you can use them to buy necessary items like food, clothing, or a new stove since these are usually protected by exemptions. If you instead decided to buy something the trustee would consider a luxury good, you risk having it sold by the trustee if it’s not exempt.
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.
You Have Income Tax Debts That Are Almost Old Enough to Discharge
Certain older income tax debts are dischargeable and can be erased through bankruptcy. New tax liabilities are non-dischargeable and must be paid back even after a successful bankruptcy case. It may be worth waiting a short period before filing bankruptcy so that your older income tax debts can be erased.
An income tax debt is dischargeable if the following three things are true:
The tax return was due at least three years ago.
You filed the return at least two years ago.
The taxes were assessed by the IRS or state franchise tax board at least 240 days ago.
Your Recent Financial Activities Will Harm Your Case
You may also experience difficulties during your bankruptcy if you continue using your credit cards. This is especially true if you use them to get cash advances or purchase what may be considered luxury goods too soon before a case. Waiting to file might put enough time between your case and any discretionary purchases to avoid raising any red flags to the trustee. If you have questions or concerns about any of this, you may want to consult with a bankruptcy attorney.
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When Is It a Bad Idea To Wait To File Bankruptcy?
If you need immediate financial relief, delaying your bankruptcy case may not be in your best interest. One of the advantages of filing a bankruptcy is the automatic stay that halts all collection actions against you. If your creditors have sent you to collections or have begun garnishing your wages or your bank accounts, an automatic stay will put a stop to it.
Also, if paying your debts means you don’t have enough money on hand to pay for housing, filing for bankruptcy could allow you to continue paying your rent on time or even stop your landlord from evicting you if the automatic stay goes into effect before they receive an eviction judgment from the court.
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 an inheritance, that could be considered part of your bankruptcy estate and distributed to creditors. If you’re not sure when is the best time to file your bankruptcy case, you should consider speaking with a local bankruptcy law firm that offers free consultations. If you have a simple Chapter 7 case, you may qualify to use Upsolve's free filing tool to file your case without an attorney.