Filing for bankruptcy is a legal process with a great deal of fine print. The bankruptcy itself is fairly simple, but all sorts of individual factors can affect the final outcome and its effects on your life. Once you decide to file, you need to figure out how to time your bankruptcy to comply with all regulations and minimize the damage that it does to your financial health.
Purchases and Transfers
There are laws in place to prevent people from running up debts they never intended to pay and then immediately filing for bankruptcy. If you have used your credit cards for cash advances of $825 or more in the past 70 days, or to purchase nonessential items of $550 or more in the past 90 days, it is best to hold off on filing. Remember that these amounts are cumulative, so even a series of small purchases could prevent your credit card debt from being discharged.
Similar laws prevent the transfer of assets to avoid having them taken to pay creditors. However, your creditors do not need to prove that your intent was to defraud. Transferring money or property to someone else without receiving anything in return could raise red flags, and all your transactions within the past two years will be considered. Of course, giving small gifts for birthdays and holidays is not likely to cause problems, but avoid any major cash transfers or lavish presents during the two years before filing.
Another sticky issue is the concept of preferential treatment of creditors. In essence, if you pay more than $600 to one creditor, and put that creditor in a better position than another, the creditor might have to repay the money to the bankruptcy trustee. For normal creditors such as banks, only the past 90 days are considered. For friends and relatives to whom you owe money, however, the court will consider the past 12 months. Although it sounds harsh, it is best to avoid repaying loans from people you know personally until after your bankruptcy.
In order to file for Chapter 7 bankruptcy, you must pass something called the “means test,” which determines your ability to repay your debts. The means test considers your income over the most recent six months, not any changes that may occur going forward. If you recently had a high income, but have now lost your job or taken a pay cut, it is to your advantage to wait a few months to file. This will ensure that your new, lower income is considered in your means test.
Foreclosures and Repossessions
If you are imminently facing foreclosure or repossession, filing bankruptcy right away might be the best choice. It will grant an automatic stay, preventing creditors from pursuing further action against you. This buys you time to get your payments back on track, and you might even have the opportunity to modify the terms of your contract during the reaffirmation process. However, if you are currently working with the bank on a mortgage modification, it may be better to delay bankruptcy. Many banks are unwilling to pursue modifications with customers who are in active bankruptcy.
Property Exemption Issues
If you have assets that are not exempt in your state, they can be seized to pay your creditors. In some cases, waiting for the asset to depreciate is the best choice. For example, if you have $6000 equity in your car, but your state only allows $5000, you can simply wait a few months for your car to depreciate to the allowed value.
In other cases, it is better to sell the asset and spend the proceeds on necessities such as rent and food, possibly over the span of several months. Yes, you will no longer own the asset, but you will benefit from the proceeds rather than losing them to your creditors.
Moving to a New State
Each state sets its own laws regarding bankruptcy exemptions, and one state’s laws might be significantly more favorable to you than another. If you move, you must live in your new state for two years before you are eligible to use that state’s exemptions. If you want to use your previous state’s exemptions, make sure you file before two years have elapsed. Likewise, if you want to use your new state’s exemptions, wait to file until you have lived there for two years.
Deciding exactly when to file for bankruptcy can be a complex process. A qualified bankruptcy attorney will walk you through the scenarios that apply to your case and help you choose the optimal time to file.
If you are ready to take the first steps toward financial freedom, call the Law Offices of David M. Offen today at (215) 625-9600 to schedule your free initial consultation. We’re here to help you every step of the way.