Should I File Bankruptcy Now or Wait?

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

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In some situations, it makes sense to hold off on filing for Chapter 7 or Chapter 13 bankruptcy. Sometimes, filing bankruptcy too early can mean losing property you would have otherwise been able to keep, or having to file for Chapter 13 instead of Chapter 7. Other times, you may be able to deal with debt in other ways, and avoid bankruptcy altogether. Read on to learn more about several situations when it might be beneficial to delay bankruptcy.

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. For more information on qualifying for Chapter 7, see Nolo's article The Bankruptcy Means Test: Is Your Income Low Enough for Chapter 7 Bankruptcy?

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.

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