When is the Best Time to File Bankruptcy?
There are many different reasons a person might consider filing for bankruptcy. While medical debt is the number one source of bankruptcy cases in the United States, many others file because of credit card debt, mortgage debt, or failed businesses. But it isn’t just the “why” you need to think about — it’s also the “when.” Is there really a best time to file? On the other hand, are there situations when you should wait and delay your petition? Our New Jersey bankruptcy attorneys explore some of the considerations you should think about before you make the decision.
Reasons to Delay: Future Debts, Mortgage Modifications, and Income Changes
You may want to consider waiting to file for bankruptcy if any of the following statements apply to you:
- You recently took a pay cut or lost your job.
- You want to change the terms of your mortgage in the near future.
- You think you have more debts on the way.
Your Pay Recently Decreased
It sounds counter-intuitive, but this could be harmful if you are hoping to file for Chapter 7. Remember, Chapter 7 bankruptcy is based on financial need, and is reserved for debtors who cannot realistically afford to accommodate the three- to five-year repayment plan which characterizes Chapter 13. For the sake of determining who is (and is not) eligible for Chapter 7, all prospective filers must take the Means Test, which compares your average income over a six-month period against the median income for a household of your size in your state.
Since the Means Test looks to the past six months, if you were just laid off or demoted, your pay cut will not be accurately reflected in your recent history. If you wait, the Means Test will have a more accurate basis for assessing your income.
You Want a Refinance Your Mortgage
When interest rates drop, many people will refinance their mortgage to save money on their monthly payments. However, if you have filed for bankruptcy, you will be subjected to a waiting period before you qualify. This waiting period begins on the date of your discharge, not the date of the filing of the case. Depending on the type of mortgage, the waiting period could be anywhere from one to four years.
Nonetheless, if you are considering refinancing, a bankruptcy still might be required. While anyone who files for bankruptcy will have to abide by the waiting period, there are still the financial requirements everyone applying for refinancing must meet. Chances are, if you are seriously considering bankruptcy, you are probably not eligible for refinancing. If that is the situation, filing for bankruptcy could still be the fastest way to right your economic ship and put yourself in a position to qualify with a reputable financial institution. You should discuss your options with our experienced New Jersey bankruptcy attorney.
More Debts Are Coming
If you anticipate incurring more debts in the near future, it may be wise to delay filing a little longer. While it is possible to make multiple filings, federal law places strict waiting periods on the time between discharges. The waiting periods for multiple bankruptcy cases are as follows:
- You filed for Chapter 7 — You must wait eight years before receiving another Chapter 7 discharge, and four years before receiving a Chapter 13 discharge.
- You filed for Chapter 13 — You must wait two years before receiving another Chapter 13 discharge, and six years before receiving a Chapter 7 discharge.
Remember, any given case only covers debts which you incurred prior to the filing. You can file again for your new debts as soon as they arise — but you will still have to wait for years before you can actually receive a discharge.
Other Reasons to Delay Filing for Bankruptcy in Pennsylvania or New Jersey
There are many other reasons to consider delaying filing for bankruptcy. For example, you could be moving to a state with more favorable exemptions. While both Pennsylvania and New Jersey allow you to choose between federal and state exemptions, another state could offer an advantage. It is possible that you will want to wait until you have established residency in the new state. Likewise, if you just moved into the area and are considering filing, you will have to wait until you qualify under the residency requirement.
In some cases, a potential filer will want to maximize the use of their exempt assets. However, and this is critically important, you should not do anything without first consulting an experienced Montgomery County bankruptcy attorney. If the court deems that any actions taken were meant to defraud your creditors, your bankruptcy could be denied and you could be subjected to fines and other penalties. For example, you could sell some non-exempt assets to pay off mortgage arrears. However, if you transfer property to a relative or friend, the transfer could be considered fraudulent and nullified by the court.
Many people considering bankruptcy have borrowed from friends and relatives. If you have recently paid any of these individuals back, you should delay filing for bankruptcy. Any payment made to a family member more than $600 one year before filing could be required to be returned and distributed to other creditors. State law could increase the length of time, so you should consult with a knowledgeable King of Prussia bankruptcy attorney.
If you are planning to file under Chapter 13 and have a car payment, you could be entitled to cram down the amount you owe if you purchased it 910 days before the filing date. This means if you owe $15,000 on a car that is appraised at $10,000, you would only have to pay $10,000 through your bankruptcy plan. The remaining balance would be considered unsecured debt. Depending on your circumstances, it might be advisable to wait until the 910 days passes to take advantage of this option.
Tax refunds are often yearly financial windfalls for families. However, if you are unable to exempt an anticipated refund, you could lose it when you file for bankruptcy. Waiting to use the refund for essential living expenses or pay down a secured asset could be a good idea.
If you recently purchased a luxury good with a credit card, you should delay filing for at least 90 days. If you do not, this debt could be challenged as non-dischargeable. It is essential to disclose any recent purchases to your Bucks County bankruptcy lawyer.
Under certain specific circumstances, some older taxes are dischargeable in a Chapter 7 bankruptcy. To meet the requirement, the tax return must have been due three years before the filing date, the return was filed within two years before filing for bankruptcy, and the IRS has not assessed your return for at least 240 days. Additionally, you cannot be guilty of fraud or tax evasion. Therefore, waiting might be essential if you wish to discharge an outstanding tax obligation.
Reasons to Act: Collections, Repossession, and Foreclosure
While there are several good reasons to consider postponing your petition, you may want to act sooner rather than later if you are worried about your assets or property being seized by creditors. But why?
Bankruptcy gives debtors special protection from creditors through something called the automatic stay. True to its name, the automatic stay comes into effect immediately upon filing (though of course it may take several days for your creditors to receive notification of the bankruptcy proceedings).
The automatic stay is an injunction, or court order, which says creditors must cease all collection actions against the debtor while the bankruptcy is in process. If you are worried about your car being repossessed or your home being foreclosed on, filing will postpone these actions and buy you time to potentially reach an alternative arrangement with your creditors.
A bankruptcy could stop a sheriff’s sale as late as the morning of the sale itself, as long as the filing is time-stamped before the property was auctioned. While this might appear to be a powerful tool, you should never wait until the last minute because there is no guarantee that the proper paperwork and requirements will be met before the sale of your home.
Other Reasons to File Bankruptcy Quickly in New Jersey and Pennsylvania
There are other reasons why not hesitating to file for bankruptcy is in your best interests.
If your landlord is trying to evict you, a bankruptcy could slow the process down. If you cannot pay your back rent, you will be evicted. Nonetheless, filing for bankruptcy will temporality stop the eviction, giving your time to make the required payment. However, if your landlord has obtained a judgment for eviction, the bankruptcy will provide no relief.
If your wages are being garnished or your bank accounts are frozen, filing for bankruptcy will free your funds. In many cases, bankruptcy is the only way to stop your creditors from using all the legal tools at their disposal.
Likewise, if a creditor is suing you, you will want to file for bankruptcy before they obtain a collection judgment. This judgment allows creditors in New Jersey to garnish wages and gives creditors in Pennsylvania a lien against your real property, including your house. If you can stop a judgment before it is entered, you could save yourself several problems in the future.
Filing for bankruptcy will help you restore your utilities if they have been turned off. Furthermore, if you have a turn-off notice, filing for bankruptcy could prevent the disabling of your current service. Once your service has been cut, you could incur additional fees on top of the payments you are already behind.
If you are about to start a better paying job, you might no longer qualify for a Chapter 7 bankruptcy. The means test looks at the six months of average monthly income before the filing date. Any delay in filing will increase your monthly income average on the required test – possibly prohibiting you from taking advantage of Chapter 7.
If you are moving to a state with less advantageous exemptions, you might consider filing before you move.
Call Our Experienced Bankruptcy Attorney to Discuss When You Should File
When you file for bankruptcy is a critical decision. The filing date could impact what chapter you are eligible to file for, how your assets will be treated, and your available options. On a final note, remember that declaring bankruptcy is not a decision to be rushed into or taken lightly. Even if you think now is the time to act, you should always consult with an experienced lawyer before you commit to any major legal decisions. To start discussing your financial situation in a free and confidential legal consultation, call the Philadelphia bankruptcy attorneys of Young, Marr, Mallis & Associates at (609) 755-3115 in New Jersey or (215) 701-6519 in Pennsylvania today.