Deciding whether to file for bankruptcy is a difficult choice that will have far-reaching impacts on one’s financial future. The timing of when to file will depend on various factors that relate to a person or married couple’s specific circumstances, including their overall finances and reasons for deciding to file in the first place.
Choosing to file at the wrong time can cause serious issues including: certain otherwise applicable debts not being discharged, delays in the proceeding, or even dismissal of the bankruptcy case entirely. Consulting with an experienced bankruptcy attorney can help an individual clear up the complexities of filing and choose the best time to initiate the proceeding. Here are some noteworthy points to consider with your attorney.
Eligibility to File Can Be Affected
The first step in deciding whether or not to file for bankruptcy is to determine whether one’s income qualifies them to file at all. This is achieved through a “means test,” whereby a person’s (or married couple’s) income from all sources is added together for the previous six months, and then divided by six to give them an average monthly income. If this monthly amount falls below the state median for New Jersey based on household size, that person will qualify to file for Chapter 7 bankruptcy. If the amount is too large, they may have to file for Chapter 13 or consider alternative options to filing.
Why is this an issue? Well, while some of us earn a steady income from a single source that’s easy to calculate, this is not the case for everyone, in particular those whose income recently decreased. Since income is calculated based on the previous six months of earnings, someone who just lost a job or had their pay cut will still be adding up all of their previous earnings (when they were receiving full pay) for the last six months in making this calculation, likely inflating the end result by a substantial amount.
Recent “Luxury” Purchases Won’t Be Discharged
It’s unlikely that someone considering bankruptcy has recently made any large luxury purchases, however, the bankruptcy code allows a “lookback” period for creditors of purchases made within 90 days of filing. This ability to lookback on the previous 90 days of purchases by a debtor is about fairness. It is an attempt to stop bad-faith actors from going on a “spending spree” with their credit cards only to wipe the debt out through filing for bankruptcy.
How does it work? Creditors will be permitted to look back at the previous 90 days leading up to a debtor’s bankruptcy filing and exclude all luxury goods and services valued over $550 that were purchased during this time period. That means that any such purchase would “survive” bankruptcy and the debt owed for that product will still be owed after the bankruptcy proceeding is complete. The solution is pretty straightforward – don’t file within 90 days of making such a purchase.
Unsure what qualifies as a luxury good or service? It’s best to consult with a qualified attorney to determine whether any of your purchases fall into this category.
Divorce May Complicate Things
When a married couple gets divorced it often affects their income and shared property interests in substantial ways. This is sure to affect any ongoing bankruptcy proceeding, so it may be worth putting the bankruptcy (or, if possible, the divorce) on hold until the other proceeding is complete. Some things to consider include:
- Eligibility to file: following the divorce a person that was previously earning too much to qualify for Chapter 7 bankruptcy may now be eligible to file. On the other hand, inaccurately listing one’s debts and liabilities based on pre-divorce accounting may result in delays or dismissal of the bankruptcy proceeding altogether.
- Division of property: filing while there is an ongoing divorce or the prospect of one is sure to affect the property interests of the individuals involved. This is especially important in determining which set of property exemptions to use when filing, state or federal. Each option exempts some items that the other does not, and they cannot be mixed. Choosing the wrong one based on an inaccurate understanding of one’s assets may result in property being distributed to creditors that may have otherwise been exempt.
- Uncertain debts: in addition to changing assets, a divorce can often change a person’s debt obligations. It’s vital that a person filing for bankruptcy accurately and completely list their debts at the start of the proceeding in order to avoid delays, dismissal, or worst of all not having a debt discharged that would have otherwise been eligible had the filing been accurate.
The timing and strategy behind whether and when to file where there is the possibility of a divorce is best discussed with an experienced attorney that has handled these complex situations in the past.
Keeping Your Home
Homeowners considering filing for bankruptcy need to pay extra attention to the timing of their filing for several reasons. Many times before filing for bankruptcy, a person that has fallen behind on their mortgage will negotiate with the bank to modify the loan terms to something that is more manageable. Banks are likely to stop these negotiations the moment a person files for bankruptcy, so it may make sense under these circumstances to delay filing until an agreement is reached.
On the other hand, the threat of foreclosure may be a reason to file sooner rather than later. While bankruptcy proceedings, and Chapter 7 bankruptcy, in particular, will not stop a foreclosure that is already in process from taking place, they may delay a foreclosure that has yet to start from the beginning until the bankruptcy is complete. Those considering filing for a Chapter 13 reorganization of their debts will need to pay special attention to any actions related to a home loan that they were hoping to continue paying in order to keep their home.
Filing Right Now – The Emergency Petition
While there are many complicated reasons to delay filing for bankruptcy like divorce or recent job loss, there is also one compelling reason to begin filing right away: the automatic stay. The automatic stay refers to the “staying” of debt collection by any and all creditors from immediately after the commencement of a bankruptcy proceeding until the final discharge is issued. This process happens automatically and does not require any judicial action.
Why is the automatic stay important? For most people this will provide immediate relief from things like wage garnishment, civil lawsuits and phone calls by debt collection agencies. If any of these creditors violate this stay by attempting to collect on a debt during the bankruptcy, the court will subject them to hefty penalties.
If an individual has a pressing need to file for bankruptcy immediately, whether to stop a specific collection or wage garnishment or for any other important reason, they may file an “emergency bankruptcy petition,” or “bare-bones petition” as it is sometimes called.
The bare bones petition is exactly what it sounds like. Rather than spending a great deal of time compiling the many detailed forms required for filing, a person seeking an emergency petition can file a much simpler set of forms to begin the proceedings (and the automatic stay), and then complete the remaining documents in the following 14 days. It’s best to consult with an attorney before making this sort of filing to avoid any errors that could delay the proceeding and thus also delay the automatic stay.
So When Should I File?
Seeking out the automatic stay is one excellent reason to begin a bankruptcy sooner rather than later. However, it is not the sole factor one should consider in making this determination. Other important issues like divorce, property ownership, and income eligibility will also factor into whether right now is the best time to file for bankruptcy.
An experienced attorney can help navigate these difficult decisions and help achieve the best results in a bankruptcy proceeding. At Rosenblum Law our attorneys are ready to help, call us today.
There are a few important downsides to filing for bankruptcy. The bankruptcy will remain on one’s credit report for 7-10 years depending on which chapter is filed. There will also be a waiting period before one can file for a second time. Most importantly, some debts are not discharged in bankruptcy.
The person filing the bankruptcy petition will be responsible for the filing fees as well as the costs of attending credit counseling and retaining an attorney. In some instances the filing fees can be paid in installments or waived by permission of the court.
Depending on the amount and kind of debt a person is dealing with, certain alternatives may be a better option than filing for bankruptcy. Some options include foreclosure mediation, loan modification and negotiating a debt settlement with one’s creditors.
Anyone considering bankruptcy should avoid making major purchases on their credit cards as these purchases may not be discharged in the bankruptcy. Individuals planning to file should also avoid large property or asset transfers as this may affect their eligibility to file.
Generally speaking employers will not be aware of a bankruptcy filing. However under some circumstances they will be notified, such as when there is a wage garnishment that needs to be halted by the automatic stay, or in Chapter 13 bankruptcy cases where the trustee is responsible for collecting some portion of the person’s wages in accordance with the repayment plan.