Many people wait too long to file bankruptcy. We have reported before that the average person who files for consumer bankruptcy has been struggling with debt for two to five years before making the decision. That’s a long time to live with financial stress, and often means a lot of hard-earned money down the drain in the form of interest and late fees. Delaying a bankruptcy filing can also have consequences such as foreclosure, wage garnishment and automobile repossession.
However, filing too soon can have negative consequences as well. Bankruptcy shouldn’t be something that you finally get around to, nor should it be a reflexive response to financial stress. Instead, it should be a strategic part of a larger plan to regain control of your finances and build a more stable foundation. Part of that plan involves making sure you’re filing at the best time based on your specific circumstances.
When you are considering bankruptcy (and possibly other debt relief options), the best first step is to talk with an experienced local bankruptcy attorney. A good bankruptcy lawyer can help you decide whether or not bankruptcy is the right solution for you, and which type of bankruptcy works best in your situation. A knowledgeable bankruptcy attorney can also counsel you as to the most strategic timing in your circumstances.
Here are some of the most common timing considerations.
Statutory or court-ordered limitations
Most people know that there are waiting periods between bankruptcy filings, but the way that calculation works isn’t what many people expect. The time varies depending on which type of bankruptcy you filed before and which you’re planning to file. The significance of the waiting period differs depending on your priorities and the type of bankruptcy you’re considering.
The timeline doesn’t actually prevent filing, but makes a bankruptcy petitioner who files too soon ineligible for discharge. The prohibition on discharge wipes out the core benefit of a Chapter 7 case. However, in many cases a Chapter 13 repayment plan can solve some financial issues even without a discharge.
Recent financial transactions and property transfers
The bankruptcy trustee has the power to avoid certain types of transactions. In simple terms, that means the trustee can undo the transfer. For example, if a bankruptcy petitioner has recently given away property or sold property for less than fair market value, the trustee may seek to reclaim that property. Another example involves preferential payments to a creditor–payments that give one or more creditors more than their fair share in the lead-up to bankruptcy.
In most situations, the trustee will only be looking at transactions over the 90 days before the bankruptcy filing. However, under certain circumstances, the look-back period may be much longer: one year for “insider” transactions and two years for fraud. In addition, bankruptcy law allows the trustee to apply longer state-law look-back periods. In Alabama, that may mean a significant extension for certain types of transactions.
What lies ahead
While Chapter 7 bankruptcy is intended to stop the bleeding and to reset your financial circumstances, filing prematurely can have the opposite effect. Only debts incurred up to the time of filing are included in the bankruptcy. That mean if you act while new, unmanageable debt is still piling up–for instance in the midst of an expensive medical crisis–you may end up with a new batch of overwhelming debt shortly after filing. Because of the waiting period imposed under the U.S. Bankruptcy Code, you wouldn’t be eligible to file another Chapter 7 case and discharge that debt for eight years.
Money you’re owed
Many people don’t realize that existing claims are assets. Some examples of existing claims are if you’ve been injured in an accident and have a personal injury claim pending, if you suffered property damage and your insurance company is dragging its feet on the payout, or if a relative has recently died and you expect to inherit property when probate wraps up in 12-18 months. Depending on the amount and type of payout you have coming or claim you have underway, the bankruptcy trustee in a Chapter 7 case may be able to take some or all of its value to pay creditors. In a Chapter 13 case, receipt of those funds might mean adjusting your plan and paying those funds to your creditors.
Collection actions that are underway or impending
Not all collection actions are the same. While it’s easy to think about the whole mass of phone calls and collection notices and threatening letters as one big problem, some debt collection issues are more urgent than others. These typically include situations that may soon result in wage garnishment, attachment of bank accounts, or the loss of property such as your home or car.
In those circumstances, it may be in your best interest to act quickly, since the automatic stay entered in most bankruptcy cases will freeze those actions. However, there’s no one right answer. The best solution for you and the best time to move forward will depend on a variety of specifics. In this situation, act quickly to get knowledgeable guidance.
The Bottom Line on Bankruptcy Timing
There are many different variables at play when it comes to deciding when the time is right to file for bankruptcy. Consulting an experienced bankruptcy attorney early in your decision-making process can help you avoid costly mistakes. At Bond & Botes, we offer free consultations to help people facing financial difficulties make informed decisions. You can schedule yours now by calling 877-581-3396 or filling out our quick contact form.
Kathryn Davis is an attorney at the Bond & Botes Law Offices in Huntsville and Decatur, Alabama. She holds a Bachelor of Arts from Auburn University, and a Juris Doctorate from Samford University, Cumberland School of Law. She is passionate about utilizing the bankruptcy process to help clients navigate through what is usually some of the lowest points in their lives. Read her full bio here.