Correctly timing your bankruptcy is important to ensure the best possible outcome of your case. For instance, a late filing—one that occurs after creditors have taken aggressive action against you—will result in an unnecessary loss of money. By contrast, if you file too soon—shortly after transferring money or property to someone else—you might be accused of engaging in fraudulent behavior. Fortunately, it’s fairly easy to avoid unwanted pitfalls. You just need to understand when—and when not—to file for Chapter 7 bankruptcy.
Filing Sooner Can Be Better Than Later
You know that creditor calls will increase if you fall behind on your bills—and as time passes, those same creditors will use increasingly uncomfortable collection techniques to ensure that they receive payment. Here are a few ways an early filing can help prevent a needless loss of money and property.
- Stops litigation. If a creditor sues you, filing for bankruptcy will stop the case in its tracks. It’s best to file before a creditor gets a judgment against you so that you avoid giving the creditor greater rights to your property (see below).
- Prevents (or stops) a wage garnishment or bank levy. A creditor with a judgment can force your employer to deduct money from your check, or require your bank to withdraw funds from your account. You’ll save money by wiping out the debt before such actions occur.
- Delays foreclosure. Filing will stop the foreclosure and provide you additional time to stay in your home. However, the relief will be temporary because Chapter 7 bankruptcy isn’t designed to help you keep your home. (You can learn more by reading Secured Claims in Chapter 13 Bankruptcy: Can I Catch Up on My House or Car Payment?)
Addressing all of the exceptions that apply to these rules (as well as the impact of an early filing) is beyond the scope of this article. You can find out more about available help by consulting with a knowledgeable bankruptcy attorney.
In Some Cases, You’ll Want to Wait to File Your Bankruptcy
Stress and debt go together—and most people want to file bankruptcy immediately to get out from under this pressure. Sometimes, however, it pays to wait—or it might be the only feasible option.
Multiple Bankruptcy Filings
If you’ve filed for bankruptcy in the past, you’ll have to wait before you can discharge (wipe out) additional debt. The length of the waiting period will depend on the chapter filed previously.
- If you filed for Chapter 7 bankruptcy. You’ll be eligible for another discharge eight years after the first Chapter 7 filing.
- If you filed for Chapter 13 bankruptcy. You’ll have to wait four years before you’ll be able to receive another Chapter 7 discharge.
If you need relief from aggressive creditors before you’re entitled to a discharge, you might consider filing for Chapter 13 bankruptcy. Although you’ll have to pay 100% of your debt, you’ll be able to do so over the course of three to five years without fear of collection activity, such as a wage garnishment.
Be aware that if the court dismissed a bankruptcy within the last 180 days, other rules apply and you might not be eligible to file immediately. Contact an attorney for a review of your case.
Avoiding a Fraud Allegation
Although rare, some people try to inappropriately work the bankruptcy system by hiding property or running up charge accounts knowing that they intend to discharge the balance. Your creditors and the bankruptcy trustee (the court-appointed official responsible for overseeing your case) will look for tell-tale signs that something’s amiss in your paperwork. Here are examples of timing issues you’ll want to consider before you file.
When did you last purchase a luxury item on credit? If you use credit to make an extravagant purchase (something that isn’t necessary) within the 90 days preceding bankruptcy, the transaction will be presumed to be fraudulent. Examples might include charging a vacation, cosmetic surgery, or golf clubs. Your creditor can ask the court to deny the discharge of such debt.
When did you last transfer money or property to someone else? On the official form entitled Your Statement of Financial Affairs for Individuals Filing for Bankruptcy, you must disclose any assets that you’ve given away or sold within a particular period. The trustee can unwind (undo) transactions not made in good faith, such as the sale of a vehicle to a friend for less than the fair market value. For example, you must report any debt payments made to relatives within the year before your filing. The reporting period for property sales and gifts totaling more than $600 is two years.
(For more information, see Avoiding and Reporting Bankruptcy Fraud.)
Bankruptcy Timing Can Be a Judgment Call
Don’t be surprised if you have multiple issues pulling you in different filing directions. For instance, if you receive a wage garnishment notice shortly after purchasing a pair of designer shoes on credit, you’ll have to decide whether to file immediately and prevent the garnishment—and potentially get stuck paying for the shoes—or wait 90 days to avoid a finding of presumptive fraud and temporarily endure the wage garnishment.
Other tricky situations can present themselves, too. Here are a few examples.
Divorce. If you’re divorcing, it’s often better to file a joint bankruptcy with your spouse and wipe out dischargeable debt before the marriage ends—but your income might be too high to qualify as a married couple. You’ll need to decide whether it’s better to file individually while still married or wait until after the divorce.
“Hot” litigation. In most cases, it makes sense to file for bankruptcy before the court enters a judgment against you—especially when facing a fraud allegation because a creditor can ask the court to determine that a fraud-related debt is nondischargeable (you’ll end up remaining responsible for it). However, if the person suing you is determined to make your life miserable, the lawsuit could follow you to federal court, and the result might be even worse. In some rare circumstances, the better course of action is to allow the case to go to judgment (and bear the subsequent wage garnishment) and wait to file for bankruptcy until after emotions have settled. (Keep in mind that fraud judgments are nondischargeable—although the creditor must first take certain steps—so this applies in unusual situations only.)
Ultimately, filing a Chapter 7 bankruptcy is a serious step. In fact, once you file, it’s unlikely that the court will let you dismiss the matter. When it comes to timing issues, you won’t go wrong asking a seasoned bankruptcy attorney for help determining the best direction for you.
Questions for Your Attorney
- What factors suggest that I should file now instead of at a later date?
- What do you predict the consequences of my filing decision will be?
- If it’s too soon for me to file for Chapter 7 bankruptcy, would it make sense to file for Chapter 13 bankruptcy instead?