Reasons to File Bankruptcy Now
Should you be planning your bankruptcy case now? There are many good reasons to plan for the filing of a bankruptcy. Some businesses, especially large corporations, do this almost routinely. Bur for individuals, bankruptcy is anything but routine. Still, to get the maximum benefit out of a bankruptcy case, it may be necessary to consider the timing of the case.
For instance, certain income taxes can only be discharged if they’re at least three years old. Calculating that three year period can be a challenge, but filing too early can be disastrous if you're stuck owing taxes that with a little planning (and patience) could have been discharged in a bankruptcy case.
There are equally valid reasons for filing immediately, even if you must forgo the benefit of discharging certain debts, like taxes. Here's a rundown of some of the issues you'll face as you consider whether to file now or file later.
1. Bankruptcy’s automatic stay can prevent repossession, foreclosure, garnishment, tax levy, eviction or a lawsuit.
Yes, you’ve seen this claim on many television commercials. Bankruptcy lawyers love to market based on bankruptcy’s ability to stop certain creditor actions from happening. This is called the automatic stay. It's an injunction designed to prevent your creditors from taking action to collect their debts outside the bankruptcy case.
If you know that a creditor is considering repossession, garnishment, levy, eviction, or a lawsuit, filing a bankruptcy case now may stop the action or at least postpone it. For instance, once the creditor is notified of the bankruptcy case, the creditor is prohibited from repossessing personal property like a car, foreclosing on real property, conducting a tax levy or filing or continuing many lawsuits. The automatic stay will also stop a garnishment of wages or a bank account, but will not usually work to get back wages or bank funds that were turned over to the creditor before the bankruptcy was filed.
The automatic stay may also prevent an eviction or the turn-off of utilities. There are restrictions, however.
- If your landlord has already obtained an order of possession from a court, the bankruptcy may not prevent the landlord from continuing the eviction process.
- A utility company will not be allowed to cut off service, and may be required to turn service back on when the bankruptcy is filed, but you must act quickly to negotiate an arrangement with the utility, which usually involves providing a hefty deposit to cover the utilities risk.
2. You recently moved to a state with less generous exemptions.
In a bankruptcy case, you’re allowed to keep certain types of property as long as the property doesn’t exceed a certain dollar value. These are called exemptions or exempt property. The bankruptcy law allows states to decide what type of property and the value of the property that their residents can claim exempt in a bankruptcy case.
Some states are more generous than others. For instance, the state of Texas allows an unlimited amount of value on a homestead property that doesn’t exceed an urban 10 acres or a rural 200 acres. Contrast that with Alabama, which only allows a very limited exemption of $15,000 in equity in a homestead, an amount that can be doubled if both spouses file bankruptcy together.
Until about ten years ago, if you were to move from Alabama to Texas, you could take advantage of the generous Texas exemptions to protect your Alabama property. Congress changed the bankruptcy law to make that more difficult. If you move to a new state, the bankruptcy law would now require that you apply the Alabama exemptions for the first 720 days you’re in Texas. There are other restrictions that might be relevant in your case. A qualified bankruptcy lawyer can help you determine the best course and the correct timing for your case.
3. You just started back to work after unemployment or started a higher paying job.
To qualify for a Chapter 7 bankruptcy, you have to show that your income over the previous six months doesn’t exceed a certain amount. That amount is calculated through a the Means Test. It takes into account your state’s median income, your income for the previous six months and many of your expenses, like the mortgage, car payment, utilities and other household expenses, medical costs, insurance, food, clothing, etc.
If you’ve been unemployed, the longer you wait to file bankruptcy after you get a job, the higher your average monthly income will be. The average monthly income figure could grow too high to allow you to file a Chapter 7 case.
The same is true if you get a raise or a higher paying job. Each month, your average monthly income for the previous six months will be higher than the month before.
4. You expect to receive property soon.
Will you get a year-end bonus? Are you expecting to receive an inheritance when your Great Aunt Tilly passes away? If you expect to receive property soon, it may be best to file a bankruptcy case before you get it. After you receive it, or even become entitled to it, the property has to be listed in your bankruptcy paperwork. To keep it, you also have to be able to apply an exemption to it. Otherwise, the trustee can take it, sell it, and use the proceeds to pay your debts.
Updated April 2018 by Carron Nicks.